| Practice area: | Education and Labour Markets |
|---|---|
| Client: | Department for Education |
| Published: | 28 May, 2026 |
| Keywords: | Childcare Education economics Labour Market Economics |
London Economics were commissioned by the Department for Education (DfE) to investigate the state of childcare providers’ finances and the cost of childcare to parents, using information from the 2025 Survey of Childcare and Early Years Providers (in partnership with IFF Research).
To assess how recent expansions in government funding for childcare entitlements have affected the sector – and its capacity to further increase provision – it is important to understand both the financial health of childcare providers and the cost of childcare to the government, providers, and parents.
Key findings:
- There was considerable variation in the financial health of childcare providers. While the average provider brought in £1.07 of income for each £1 of costs, some providers were making a significant loss. In particular, around one in four nursery class childcare settings (26%) and one in three childminders (30%) brought in less than £0.80 of income for each £1 of costs. In contrast, over two in five private group-based providers (43%) brought in more than £1.20 of income for each £1 of costs.
- The unit cost of childcare, the average cost of delivering one hour of childcare, increased by 8% from 2024 to 2025, with the largest increases for childminders (14%).
- Staffing costs continued to make up the majority of providers’ costs (between £0.70 and £0.88 for every £1 spent, dependent on provider type). The significance of staffing costs to providers and an average hourly pay of £13.50 per hour highlights the importance of recent increases in the National Living Wage on childcare providers’ finances.
- Even before the expansion of childcare entitlements was fully rolled out, nearly two-thirds (63%) of the average provider’s income came from government-funded entitlements (paid to providers for providing funded entitlement hours), up from 47% in 2024. This shift from parent-paid fees to entitlement funding was most noticeable among childminders. The proportion of income from parent-paid fees for the average childminder dropped from 71% in 2024 to 48% in 2025.
- Average hourly pay was higher for staff working at school-based providers. This was driven by both a higher concentration of highly qualified staff among school-based providers and a greater hourly pay premium associated with higher-level qualifications (relative to lower-level qualifications) at school-based providers.
- For under two-year-old and two-year-old children, hourly entitlement funding rates were higher than hourly parent-paid fees for all provider types (the average hourly entitlement funding rate was £3.54 per hour higher than hourly parent-paid fees for under two-year-olds and £1.13-£1.18 per hour for two-year-olds depending on the type of entitlement).
- However, for three- and four-year-olds, hourly entitlement funding rates were lower than hourly parent-paid fees for all provider types except nursery class childcare settings where rates were around equal (the average hourly entitlement funding rate was £0.94 per hour lower than hourly parent-paid fees).
The full report can be found on the Department for Education website here.
Ella Lingard is a Senior Economic Consultant at London Economics, working in the Education and Labour Markets team. She leads the research on the Survey of Childcare and Early Years Providers. She can be contacted by email at [email protected].
Dr Su-Min Lee is a Principal Economist at London Economics, primarily working in the Education and Labour Markets team. He leads London Economics’ research in childcare and early years, which ranges from evaluating the impact of childcare policies on parental labour market choices to understanding trends in the childcare workforce and childcare affordability. He can be contacted by email at [email protected].