Nurseries in crisis
Published
England's nurseries are surviving on a financial tightrope, according to new research by money.co.uk business loans. This has uncovered a hidden imbalance in England's childcare funding system: the government overpays nurseries for funded places for children aged two years and under, while significantly underpaying places for three-and-four year olds.
The research suggests that nurseries are only staying afloat by using the surplus from one to cover the shortfall from the other — a model that becomes increasingly fragile as more older children take up their funded entitlement.
Analysis of 2025 Department for Education data shows that government funding for children under two exceeds average nursery fees in every region of England, by as much as £3.57 per hour in the South East.
For three and four-year-olds, the picture is reversed: funding falls short of average fees in every region, by up to £2.07 per hour in London — a gap worth £2,360 per funded child each year.
Providers rely on the surplus generated by funded under-two places to offset the losses they make on funded three and four-year-old places. As long as the mix of children in a setting stays relatively stable, the model just about works. But that balance is fragile
As the government continues to expand its funded childcare offer — encouraging more families to take up their entitlement — nurseries risk seeing their proportion of three and four-year-old funded places grow. But a shift in occupancy mix of even a few places could quickly push a provider from a narrow profit into a loss.
The financial precariousness of nurseries runs deeper than the funding gap alone. The average private nursery in England makes just £933.66 profit per child each year — around £78 per month — after operating costs. Providers must fill at least 31 places before covering their costs at all.
Matt Browning, money.co.uk business loans expert, says:
‘This data reveals that England's childcare funding system contains a structural imbalance that many people — including parents — may be completely unaware of. Nurseries are not simply charging what they need; they are navigating a funding model that pays generously for some age groups and falls significantly short for others.
‘Providers that understand the risk can take steps to protect themselves — whether by reviewing their financial planning, maintaining a healthy mix of funded and private-paying places, or using flexible finance to build resilience against periods of lower income or unexpected costs.’
