Funding challenges for early years providers: a practical guide for nursery owners

In this article, we explore the key funding streams, explain how to navigate the legal requirements relating to each and provide our insight into how to manage funding disputes.

Core funding streams

Early Years providers typically rely on a combination of funding sources.

Many offer childcare on a privately-funded basis, whereby fees are paid by parents or other third parties for the hours or days a child attends a particular setting and in accordance with the provisions of a specific nursery agreement or parent contract.

In the current economic climate, with parents having less disposable income than in previous years, and with more available entitlement to public support, many providers also accept public funding. These generally comprise:

• The EYFE: Government-funded hours for eligible families, which form the backbone of financial support for early years and childcare provision.
• Additional needs funding: Targeted financial support for children with specific needs, including those with special educational needs and disabilities (SEND).
• Tax-free childcare/vouchers: Schemes designed to assist parents with the costs of childcare.

Providers who offer funded places should ensure they understand what funding is available and what it may be used for. They should be expressly clear about the services which can be accessed free of charge to those entitled to funded childcare and which services will be additional and charged as extra.

There are many online resources available, but the nuances do vary by local authority and type of funding so care should be taken to ensure that generic resources will apply to a particular scenario.

EYFE

From September 2025, the amount of Government-funded hours available to children of eligible families in England has included:

Entitlement Type	Age Group	Hours per Week	Eligibility
Universal	Children aged 3 and 4	15	All children
Additional hours	Children aged 3 and 4	15, in addition to those claimed under the Universal entitlement	Eligible working parents
Families receiving additional support	Children aged 2	15	Families receiving additional support
Working parent	Children aged 9 months to 2 years, and those aged 2	30	Eligible working parents

EYFE is intended to deliver “free, high quality, flexible childcare” to eligible families through providers registered on the Early Years Register. 

Providers are not required to offer EYFE. Determining whether or not to do so generally involves consideration of a number of factors, including the budgets of individual settings, staffing levels and capacity and a provider's overall business strategy. Where decisions are made to offer EYFE, the provider must be approved by the local authority and the arrangements will be subject to the provisions of the particular funding or grant agreement.

In February 2025, the Department for Education issued statutory guidance for local authorities which provided greater clarity with regards to the allocation of funding and charging requirements. This guidance, which came into force on 1 April 2025, emphasised that EYFE must be offered entirely free of charge to parents. Providers must not impose any mandatory fees in connection with the free hours and cannot lawfully add indirect charges that could act as a barrier to access, thereby undermining the principle of free provision. In particular, providers are prohibited from charging "top-up" fees, business running costs or registration fees or non-refundable deposits as a condition of parents taking up a free place for their child.

Government funding is not intended to cover ancillary costs, such as meals or snacks to be consumed by children, other consumables (such as nappies or sun cream) or additional optional activities, and providers can charge for these provided the charges are voluntary for parents. Providers are also permitted to charge parents for any additional hours in accordance with their usual terms and conditions, but only where the taking up of any such hours is not a condition of parents accessing the free hours to which their child is entitled. 

Providers must provide details of any chargeable extras on their websites and, from January 2026, ensure that all invoices and receipts are itemised to provide a clear break down of the free entitlement hours, any additional privately-funded hours, and any charges associated with food, other consumables and optional activities.

Failure to comply with the requirements relating to the provision of EYFE may lead to the withdrawal of funding, termination of a provider's funding or grant agreement and/or a provider's removal from their local authority's directory of providers. It may also result in complaints or claims from parents seeking to recover sums they have paid over and above those which were permitted to be charged.

It is therefore important for providers to ensure that they understand the requirements of their EYFE provision and are compliant, including with regards to the information they provide to parents. We recommend that providers audit their current arrangements.

Additional funding for those with specific needs

Additional funding streams are available to ensure that all children, regardless of circumstance, can benefit from high-quality early education and that disadvantaged children are supported. Providers can use these additional funds to purchase resources, provide additional staff training or enhance specific learning initiatives such as speech and language development.

The Early Years Pupil Premium aims to provide additional funding to support children who receive additional support, such as those whose parents receive income support or jobseeker's allowance, and who are entitled to free childcare under any of the EYFS schemes.

Children with disabilities may be eligible for funding under the Disability Access Fund. This fund offers providers an annual payment per eligible child, which must be passed in full to the childcare provider and not offset against any other funding.

In addition, providers may be entitled to access additional funding for children with low or emerging needs from their local authority's Special Educational Needs Inclusion Fund. The level of funding that may be claimed will depend upon the level of need in any particular area, and is to be paid to providers in the form of 'top-up' grants, determined on a case by case basis. Funding is to be distributed to providers in a timely manner, and with the aim of ensuring that each child's specific needs are met.

For children with more complex needs and who require additional support and resources in order to participate in education and learning, funding may be sought via High Needs Funding. This funding is provided to local authorities through the high needs block of the dedicated schools grant and is intended to support them in meeting their statutory duties in relation to children with SEND.

Handling disputes

We have seen more challenges from both parents and local authorities in relation to charging arrangements. Disputes are many and varied and may trigger different mechanisms for resolution. Being proactive and prepared is key.

Unpaid fees are common and disputes increasing. It may help to empower parents to understand how they may be able to access additional funding and understand their rights, to encourage them to raise any concerns at the earliest opportunity.

Parents are treated as consumers in a legal sense and any contractual ambiguity resolved in their favour, so robust and clear contracts are a must. Invoices should be reviewed now to ensure they provide the level of information which will be required from January. This should help to manage expectations and reduce complaints and disputes, but they will not be a panacea.

Where disputes arise, early engagement in a proactive and professionally courteous way is vital and providers should be ready to evidence the charges raised and demonstrate compliance with their duties.

Disputes with local authorities are generally more complex, and often characterised by delay. It may simply be a matter of the local authority delaying in sending on the EYFE and, in those circumstances we would recommend proactivity, perseverance and escalation.

Sometimes disputes may be more complex and involve alleged breaches of EYFE agreements or delays / refusals in relation to funding allocations. There are mechanisms to address such disputes, including via complaints procedures, escalation to the LGSC Ombudsman or through a public law / Judicial Review route. 

Providers are frequently drawn into disputes between families and the local authority about needs assessment or access to sufficient funding to meet a child's needs.

To navigate these challenges effectively and maintain high standards of care, our advice to providers is to:

• Adopt a holistic, child-centred approach at all times;
• Pursue any unpaid fees quickly - the longer you leave it the less likely you are to recover them;
• Build effective stakeholder relationships, and do not be afraid to escalate matters within a local authority if they are not fulfilling their duties;
• Build strong partnerships with parents and carers by helping them to understand their entitlements, supporting them in making applications or raising challenges and seeking always to maintain an open and constructive dialogue;
• Keep robust and effective records, including in relation to funding, the services provided to the children in their care and decision making;
• Identify any emerging and/or additional needs early, prioritise the Assess–Plan–Do–Review cycle and apply for EHCP Needs Assessment promptly.

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VWV provides advice and support to providers navigating the unique challenges facing the Early Years sector. Should you have any queries arising from this article, please do not hesitate to contact Stephanie Cooke.