Proposed changes to early years funding FAQs

The Government has published a consultation which proposes significant changes to the way that:

  • Central government allocates early years funding to local authorities; and
  • Local authorities distribute government allocations to early years providers.

The overall purpose is to ensure that funding is distributed more fairly and transparently across the country. The system by which government currently allocates funding to local authorities is based on historical council expenditure – not the actual costs of providing childcare. The Government also wants to stop local authorities from retaining too much (‘top-slicing’) and also from paying different rates to different types of providers, for example by paying higher rates to maintained settings (schools and nursery schools) than private, voluntary and independent (PVI) providers e.g. childminders, nurseries.

Both of these mean the funding levels that providers receive for delivering the same entitlement vary significantly, something which is neither fair nor efficient.

PACEY (with support from hundreds of members who have shared feedback via surveys, social media, PACEY Local and/or who have attended policy roundtable discussions with Government) has worked hard to ensure this proposed new funding approach to the free entitlement reflects the experiences of PVI settings and looks to address the sustainability concerns they have. We believe it is a strong basis for future discussion and would encourage members to take the time to feedback their views via the Department for Education’s consultation that closes on September 22. This briefing should support your understanding of what is being proposed.

The consultation reiterates that the majority of 30 hours places will need to be delivered by the PVI sector. The Government recognises that market rates exceed government funding rates, and that it can only persuade significant numbers of providers to switch from parent-paid hours to government-funded hours. by distributing the early years budget as effectively and fairly as possible.

The Government’s proposed solution is to introduce a new early years national funding formula.

What is the early years national funding formula?

This is a new means of allocating funding for the free early education and childcare entitlement for 3- and 4-year-olds, both the existing universal 15-hour entitlement and the new 30-hour entitlement for working parents. The funding for disadvantaged 2-year-olds falls outside of this formula and will continue as is.

Under the new formula, funding per child to each local authority will be determined by three factors:

  • A universal base rate of funding for each child will allocate the majority (89.5%) of all funding;
  • An additional needs factor reflecting the extra costs of supporting children with additional needs – calculated through looking at the number of children in the authority eligible for Free School Meals (FSM) and who speak English as an Additional Language (EAL);
  • An area cost adjustment reflecting the different costs of providing childcare in different areas of the country.

Will any providers get paid less than they do now?

The Government has said that the majority – 75% - of local authorities will see an increase in their hourly funding rates under the new national formula. It has calculated that the impact on PVI providers is even more positive, with 88% of local authorities paying PVI providers higher rates under the new formula. On average, PVI providers will see a 16% increase and schools will see a 14% increase.

However, it has acknowledged that 25% of local authorities will see a reduction, and in 12% of authorities, this will translate into lower rates for PVI providers.

It is proposing a ‘funding floor’ so that no local authority face a reduction in its hourly funding rate of more than 10% against its 2016-17 baseline as a result of introducing the formula.

The Government’s ambition is that all authorities should be ‘on formula’ by 2019-20.

How will the Government ensure that local authorities don’t top-slice the funding?

The Government is proposing to require local authorities to pass on 95% of early years funding to providers by 2018-19. Next year (2017-18), they will be required to pass on 93% of funding directly.

Will local authorities really be forced to pay all providers the same amount?

Local authorities will be required to use a ‘universal base rate’ of funding for all providers. This means that a child in a PVI setting will receive the same base rate as a child in a nursery class in a primary school. Within the PVI sector, rates will also be harmonised, so that nurseries and childminders receive the same amount. Authorities will have until 2019-20 to implement this significant change.

Maintained nursery schools (MNS) have the most to lose, as they currently receive significantly higher hourly rates than other early years providers. The Government is proposing £55 million of supplementary funding for at least two years to help them weather the transition. It has also indicated that it would like to see nursery schools evolve to meet the changing needs of parents, for example by providing more flexible provision and acting as community hubs.

Which funding supplements will be permitted?

Local authorities will still have the discretion to top-up the base rate with supplements, although the Government is proposing that these be capped to 10% of the hourly rate and strictly limited to five areas:

  • Deprivation – this is currently mandatory, and Government is proposing that it remains so, with local authorities still able to use their own choice of metric for allocating funding;
  • Rurality/sparsity – this would allow local authorities a discretionary amount of funding using their own choice of metric to help rural childcare settings remain sustainable;
  • Flexibility – this would allow local authorities to use funding to promote different types of flexibility, including growing the childminder segment of their local childcare market;
  • Efficiency – this would allow local authorities to reward and recognise providers who make optimum use of their income to provide high quality childcare, invest in their workforce and develop and share strong business partnership with other providers;
  • Delivery of the additional 15 hours free childcare – this would provide a means of local authorities incentivising settings to participate in 30 hours.

The Government has said that it does not plan to permit supplements based on quality, as it believes good quality provision should be expected of all providers in the sector. Quality is an ‘expectation’ rather than an ‘optional extra’.

It is keen to hear the sector’s views on both the categories of supplements permitted, as well as the 10% cap.

How does the funding formula affect the Early Years Pupil Premium (EYPP)?

The Government has confirmed that EYPP will continue as a separate funding stream distinct from the new funding formula. Providers will therefore continue to receive 53p on top of the hourly rate from the local authority if they care for children eligible for EYPP.

Will there be any further support for children with special educational needs and disabilities (SEND)?

There Government is proposing two means of increasing the amount of funding that providers receive for caring for children with special educational needs and disabilities (SEND):

Disability Access Fund – an automatic up-front payment (amount still to be confirmed) for providers for every child in their setting in receipt of Disability Living Allowance (DLA);
SEN Inclusion Fund – local authority-run funds to provide additional top-up funding to providers to improve outcomes for children with special educational needs.

How can I find out how much my local authority will pay me under the new formula?

The Government has published a table setting out the indicative hourly funding rates providers might expect to receive in each local area under the proposed new formula to deliver the entitlements for 2-, 3- and 4-year-olds to help them plan ahead for the introduction of 30 hours in September 2017.

However, the table comes with the important caveat that the final rates are likely to be ‘somewhat different’. The calculations also make a couple of assumptions, namely that a universal base rate is implemented straight away (although it is not required until 2019-20) and that providers receive an ‘average’ amount of funding from supplements.

Are there any changes to 2-year-old funding?

Last year, the Government announced that it was increasing the average hourly rate for caring for eligible 2-year-olds from £5.09 to £5.39. However, it is not proposing to change the current formula used to determine 2-year-old funding, which it claims is already fair and transparent.

When can I expect to receive the new rates?

If you are currently delivering the early education entitlement, you will receive a new hourly rate in April 2017. The new rate will be rolled out to the additional 15 hours in September 2017, when 30 hours of free childcare for working parents is implemented nationally. A small number of local authorities are involved in early implementation of the additional 15 hours. If you live in one of these areas you may have earlier involvement via your local authority. You can find out more about the Early Implementers here.

The consultation documents make it clear that local authorities will be expected to pass the same rates of funding to providers for the existing 15 hours and the additional 15 hours.

How can I let the Government know my views?

The Government and PACEY are encouraging as many early years providers as possible to respond to the consultation online by the deadline on 22nd September 2016.

PACEY is also keen to hear your views so that we can ensure our response is as representative as possible. Please get in touch as soon as possible with your feedback by contacting our policy team.