Cost of living: Paying for childcare for under-fives

1. Cost of living: Paying for childcare for under-fives

The government announced a significant increase in the free hours entitlement in the March 2023 budget. It said it would provide 30 hours a week of free childcare for 38 weeks a year (equivalent to the number of weeks in a school year) for eligible working parents of children aged nine months to three years. This will substantially expand the current offer of 30 free hours for most working parents of three- and four-year-olds and 15 free hours for disadvantaged two-year-olds. This support will be rolled out in stages starting in April 2024. It will be fully implemented from September 2025.

2. How much does childcare cost in England?

Care for children under school age can be provided by private nurseries, school-run maintained nurseries, voluntary group-based providers and registered childminders.

In 2022, mean hourly fees, as identified by the government’s provider survey, were:

• children under two: £5.38
• children aged two: £5.72
• three- and four-year-old pre-school children: £5.60

Fees vary between English regions. Mean hourly fees were highest in London, followed by the south-east and east of England. They were lowest in Yorkshire and the Humber and the north-east. For example, the mean hourly fee for children under age two was £4.85 in Yorkshire and the Humber, while in London it was £7.31, over 40 percent higher. The Department for Education (DfE) highlights that differences in fees mirror differences in average levels of disposable household income. In 2020 average disposable income was highest in London (£29,890) and lowest in the north-east (£17,416).

The DfE conducts an annual survey of parents to monitor trends and public attitudes in childcare and early years education. In families with pre-school children (aged zero to four), 76 percent used formal childcare (which does not include relatives, friends or neighbours) in 2021.

Among families containing only pre-school children, 45 percent felt that local childcare was affordable, and around a quarter found it difficult or very difficult to meet their childcare costs.

3. How do these costs compare internationally?

The Organization for Economic Cooperation and Development’s data shows that in 2021 the UK had the highest childcare costs as a percentage of the average wage, though data was not available for some countries.

There are significant difficulties in comparing childcare costs across countries because of different structures and types of government support. According to the Institute for Fiscal Studies (IFS), the cost of childcare in England relative to other European countries is often overstated because of these differences. However, the IFS finds that even after correcting for the most serious methodological issues England remains an expensive country for childcare. It states that part of the reason for this could be that childcare providers are required to have more staff per child in England than in some other countries.

4. What government support is there for childcare costs at the moment?

Some two-year-olds are entitled to free childcare. Two-year-olds can receive 15 hours a week of free childcare for 38 weeks of the year if their parents or carers receive certain benefits or if the child:

• is looked after by a local authority
• has an education, health and care plan
• gets disability living allowance
• has left care under an adoption order, special guardianship order or a child arrangements order

Parents whose immigration status states they have no recourse to public funds can get free childcare for their two-year-old if their income does not exceed certain limits.

All three- and four-year-olds not in school can receive 15 hours of free childcare per week for 38 weeks of the year. Children can receive an additional 15 hours if their household meets certain conditions. These include that the parent or carer (and their partner, if relevant) is in work, earns over a certain amount (which depends on their age), and does not earn more than £100,000 per year.

The government also operates a tax-free childcare scheme. For every £8 a parent or carer pays into a special childcare account the government also pays in £2, up to a maximum of £500 every three months per child. This can then be used to pay for childcare. If the child is disabled, there is a maximum of £1,000 every three months.

Support for childcare costs is also available through the benefit system. Parents and carers claiming working tax credits can add an extra amount to help cover the cost of childcare. Recipients of universal credit can claim back up to 85 percent of childcare costs if they (and their partner, if relevant) are working or have a job offer.

The IFS has argued that the current system of support is complex, and that “this complexity makes it difficult for parents to work out what support they’re entitled to and how to get it”.

5. How much does the government pay providers for the free hours?

Funding for the 15 and 30 hours entitlements is determined using the early years national funding formula (EYNFF). The EYNFF determines local authorities’ funding allocations. Each authority decides the hourly rate paid to providers in their area, though with certain conditions specified by the government. For 2022/23, the government set a national minimum funding rate for three- and four-year-olds of £4.61 per hour. Minimum rates in some local authorities will be higher than this because of requirements that rates increase by a certain percentage on the previous year.

Government spending on free early years entitlements has increased significantly since 2010. In 2009/10 total spending on free entitlement programmes stood at around £1.8bn (in today’s prices) and had more than doubled to reach a peak of £4.2bn in 2018/19. It has since fallen back slightly to just over £4bn in 2021/22.

However, most of this growth is due to increases in the free entitlement rather than increases in funding paid to providers. It has been extended several times to cover more hours, more weeks and more children. In addition, because nearly all three- and four-year-olds take up their universal entitlement, population growth tends to push up total spending.

The IFS highlights that funding for providers to deliver the free hours has not kept up with inflation or increases in the minimum wage. While the budget for core funding per hour to deliver the free entitlement has increased in each of the last three spending reviews, the core hourly funding rate for three- and four-year olds has fallen by 14 percent in real terms when provider-specific cost pressures are taken into account. As a result, some providers raise prices for younger children to offset reduced funding for older children.

It has been argued that some providers have had to close because the free hours funding does not cover providers’ costs; however, Ofsted has not pointed to this as a probable cause of recent decline in the number of providers. Ofsted data reveals that at the end of August 2022 there were 65,600 registered childcare providers, down eight percent on the previous year. This was largely because of a fall in the number of childminders. However, the number of places only declined by two percent. Ofsted said the decline in the number of providers and available places “may in part be caused by the considerable decrease in the birth rate” as well as more parents working from home, which could reduce demand for childcare places.

6. What new support did the government announce in the March 2023 budget?

The government announced a significant increase in the free hours entitlement in the March 2023 budget. It said it would provide 30 hours a week of free childcare for 38 weeks a year for eligible working parents of children aged nine months to three years. This will be rolled out in phases from April 2024:

• From April 2024 eligible two-year-olds will receive 15 free hours.
• From September 2024 eligible nine-month- to two-year-olds will receive 15 free hours.
• From September 2025 eligible nine-month- to two-year-olds will receive 30 free hours.

It will not be universal: the criteria for eligibility will be the same as for the current 30 hours offer for three- and four-year-olds. There will not be a universal 15 hours element to the 30 free hours for nine-month-olds to three-year-olds, as there is for three- and four-year olds.

The government also introduced measures to increase funding and reduce costs for providers. It said it would provide more money in 2023/24, increasing again in 2024/25, to “substantially uplift” the funding rate paid to providers to deliver the existing free hours offers. It said it would also change the minimum ratio of staff to children for two-year-olds from 1:4 to 1:5 and provide start-up grants for new childminders.

The IFS highlights that the increase in free hours will mean the government controls the funding for a significantly higher proportion of the childcare market than it does now (80 percent rather than 50 percent). It says this “raises the stakes” for getting the funding right: if it is too low providers may choose not to deliver the entitlement or close entirely.

The IFS also states that while the increased funding for existing entitlements announced in the budget will be roughly enough to cover expected rises in costs, the sector has already absorbed a 13 percent real cut when adjusted for the cost inflation they have faced.

The campaign group Pregnant then Screwed welcomed the changes but expressed concern about funding levels, saying:

[…] we are elated to hear that the childcare sector will now receive a significant investment […] we thank [ministers] for hearing our cry and bridging the gap for mothers from the end of maternity leave so that they are supported to be able to work.

However, we are concerned that the money pledged is not enough to reduce costs for parents sustainably. It is imperative that there is a clear and remunerated strategy to attract more educators into the sector, to retain those workers and to offer progression opportunities. Without a workforce plan providers will continue to be forced to close, and increasing ratios will be detrimental to staff retention, what they need is better pay which will come from significant investment into the sector and into the roll out of the free hours scheme.

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