Funded by the Nuffield Foundation
Spending on public support for early childhood education and care is the fastest-growing part of the education system, and one of the areas where public service spending has increased most quickly over the last quarter century. As Figure 1 shows, total spending across all childcare support programmes is set to be £10.5 billion in 2025–26 – twice as high as in 2010–11, and six times as high as in the early 2000s. This means that public support for childcare has a strong claim to be the newest branch of the welfare state.
The free entitlement to a funded childcare place
The main source of support is the ‘free entitlement’ to a funded childcare place. Following successive extensions in the eligibility for and generosity of these entitlements, parents can now receive funded hours through:
a universal offer of up to 15 hours a week1 for all 3- and 4-year-olds;
a disadvantage offer of 15 hours a week for the most disadvantaged 2-year-olds;
an extended entitlement to up to 30 hours a week for 3- and 4-year-olds in working families (combining the 15-hour universal offer with a 15-hour top-up).
Alongside these schemes is the new ‘expanded’ entitlement announced at the March 2023 Budget by the previous government (and subsequently implemented by the current government). These expanded entitlements have been rolled out over the last two years; since September 2025, they offer up to 30 hours a week for children aged 9 months to 2 years in working families.
These expansions to the free entitlement – as well as falling spending elsewhere – mean that funded childcare hours account for a much larger proportion of overall public support for childcare. Spending on the free entitlement stood at £2.3 billion in 2010–11 (46% of total childcare spending). By 2025–26, free entitlement spending of £8.7 billion accounts for 83% of total childcare spending.
Expanded childcare entitlements
These expanded entitlements for working families with children under 3 have doubled total spending on the free entitlement in the last two years (from £4.4 billion in 2023–24, to £8.7 billion in 2025–26). In January 2025 – before the new entitlements were fully rolled out – around 470,000 children were using these new places for working parents. 64% of eligible children under 2 were taking up a place – and the equivalent figure for 2-year-olds was 84%.
Indeed, the new entitlements proved much more popular than initially expected, as we discussed last year. In 2024–25, the number of hours taken up was 26% higher than initially expected, and spending was revised upwards by £440 million (28%).
If the new entitlements continue to be this popular, spending in 2028–29 could reach between £4.8 billion and £5.3 billion (in current prices). On a central estimate, that is around £1 billion more than would be implied by a real-terms freeze in the allocations set out in the 2023 Budget, when these policies were first announced. A top-up announced at the Spending Review in June this year (worth £640 million in today’s prices for 2028–29) will go some way to closing this gap, but could still leave additional funding pressure if these new entitlements continue to prove popular.
While delivering such a large increase in publicly funded childcare was a major undertaking, early signs suggest that childcare providers and the government have largely met the challenge. Nationwide, over 90% of parents who applied and were approved for the entitlements secured a place. Of parents not using any childcare (formal or informal), fewer than 5% cited costs or availability as a reason. However, there may be signs of additional pressure on supply in some parts of the country (notably in London). And in the years since the COVID-19 pandemic, the share of parents with 0- to 4-year-olds who report that childcare availability is a challenge in their area has risen from 26% to 39%.
Cost pressures for childcare providers
One reason that the roll-out of the new childcare entitlements has been relatively smooth was a big increase in per-hour funding rates for children under 3. The funding rate for 2-year-olds rose from £6.00 in 2023–24 to £8.35 the following year (in cash terms). The government offered an average £11.17 per hour in funding for children under 2. Both of these were substantially higher than the market prices that childcare providers had been charging – making it much more attractive to offer new childcare entitlements.
A big boost in funding for younger children was meant to more closely reflect the underlying costs of delivering care, which are much higher for the youngest children (as required staff-to-child ratios are much tighter). By contrast, funding rates for 3- and 4-year-olds rose by 25p in cash terms (and were somewhat below the market prices charged).
Over the longer term, funding rates for 3- and 4-year-olds are at essentially the same real-terms level as they were in 2016–17. But childcare providers’ costs have risen much more quickly than economy-wide inflation, as rapid increases in the minimum wage, pension contributions and, most recently, employer National Insurance contributions have pushed up costs. If these sector-specific costs are taken into account, core funding per hour this year is 19% below its 2017 peak for 3- and 4-year-olds (as shown in Figure 2). Effective resources per hour fell by 4% just in the last year.
Wider support for childcare
Support through the benefits system
Families receiving universal credit (or, in the past, benefits such as tax credits), and where all parents are in paid work, are eligible to have up to 85% of their childcare costs paid. The total subsidy is capped at £1,031.88 for one child or £1,768.94 for families with two or more children.
Tax-free childcare
Families where all parents are in paid work are eligible to open a tax-free childcare account for each child aged 11 or younger (16 or younger if disabled). For every £8 that parents contribute to these accounts, the government adds a £2 top-up (up to a maximum of £2,000 per child per year). Parents can then use these accounts to pay for eligible childcare expenses.
Childcare vouchers
The predecessor to tax-free childcare, spending on employer-supported childcare vouchers has been falling as more parents transition to tax-free childcare (or age out of the system). Parents agree to a cut in their salary, and their employers provide them with a childcare voucher of equal value. This effectively means that parents pay no income tax or National Insurance contributions on the income they use to purchase these vouchers.
Support for students
The largest programme of support for students offers full-time undergraduates up to 85% off their childcare costs. These grants are means-tested and restricted to those studying full-time university courses in England. The separate ‘Care to Learn’ programme supports parents studying in further education, though spending is much smaller.
Who benefits from England’s childcare support?
While overall spending on childcare support has grown rapidly, there have also been big changes in how this support is targeted to different groups. Figure 3 shows the share of the early years budget allocated to different groups: universal services (the 3- and 4-year-old entitlements), support targeted at working families through tax reliefs and through the working family entitlements (the extended entitlement for 3- and 4-year-olds and the expanded entitlement for children under 3), support for low-income working families through the benefits system, and support for low-income families (working or not) through the 2-year-old disadvantage offer.
In 2009–10, for example, spending on the universal entitlement was roughly equal to spending on childcare subsidies through the working-age benefit system (43% and 44%, respectively), with spending targeted at working families making up the rest. Cuts to the generosity of childcare subsidies in the benefit system saw spending (and thus the share of spending) fall sharply over the early 2010s, with the share of total spending falling by half (to 22%) by 2014–15.
The full introduction of the 2-year-old disadvantage offer in 2014–15 meant that around a sixth of childcare spending was explicitly targeted at disadvantaged families. Since then, a combination of falling population, falling eligibility and lower take-up has seen total spending on the 2-year-old offer fall by almost half, from about £1 billion in 2014–15 to £570 million in 2025–26.
The group that has seen the largest growth in its share of total spending has been working families. The share of spending targeted at this group more than doubled over the 2010s, reaching 32% in 2023–24. The introduction of the expanded entitlements for children under 3 in working families will accelerate these shifts. Between 2023–24 and 2024–25 (when the first phases of the new entitlement roll-out occurred), the share of spending targeted at working families rose from 32% to 48%. In 2025–26, the share rose to 58%. Taking all programmes targeted at working families (low-income and not) into account, the share of spending requiring families to be in paid work has risen by 18 percentage points (from 47% to 66%) in just two years.
A review of England’s early years system
England’s early years system has undergone a series of transformations over the last 25 years, with spending more than six times as high as it was in the early 2000s. In a context of pressures in many other areas of public services since 2009, the early years system stands out as an area where successive governments have chosen to genuinely increase the scale of what the state delivers.
This rapid growth in spending raises the stakes for good policy design. Unlike other stages of education, spending in the early years has at least three potential direct aims: supporting children’s development by providing high-quality early education; encouraging parents (especially mothers) to work by ensuring a supply of accessible and affordable childcare places; and reducing the amount that families spend on what can be a very expensive service. This trio of objectives maps onto the current government’s opportunity mission, growth mission and cost of living ‘milestone’.
A review of England’s early years system – confirmed at last year’s Budget – provides a timely opportunity to consider the scale of overall support, how this support is allocated across groups, what objectives it is trying to meet, and how well it is performing against those aims.
With a policy area that touches on so many core objectives of the government, there is a big opportunity to be had from getting the design of the early years system right. But this also makes policymaking much more difficult. There are real tensions and trade-offs between policies aimed at supporting children’s development and at helping families into work – the types of families targeted, the level and design of the subsidy rate, and the emphasis on quality and flexibility will all differ.
Rather than telling policymakers to choose just one objective, the key insight here is to think about whether the early years system as a whole is delivering on these different aims. A well-functioning early years system could have some policies that target labour supply while others focus on child development and the disadvantage gap. Instead, trying to ensure that every policy ticks every box risks developing a set of programmes that fail to achieve their potential in each dimension.
