Guidance

Local authority funding rates setting process for childcare providers – case studies of strong practice

Published 10 December 2024

Applies to England

1. Introduction

In 2025 to 2026, we have introduced an expectation that local authorities should communicate funding rates to early years providers in their area by a new deadline of 28 February. This expectation will be set out in the early years funding operational guidance for 2025 to 2026, and we expect to mandate this through changes to the statutory regulations from 2026 to 2027. This decision has been made to ensure childcare providers receive their funding rates as early as possible to support business planning ahead of each new financial year.

We know that local authorities carry out a significant amount of work each year to ensure that they can announce provider level rates as early as they can. This page outlines case studies of strong practice identified through engagement with local authorities who announce their rates comparatively early, and is designed to be a resource for all local authorities where they are considering improvements to their local arrangements.

2. Case Studies

We have spoken to local authorities who were relatively early in communicating local funding rates to providers in 2024 to 2025, to understand where they felt particular approaches supported them to do this. Through this work, we have identified three areas of strong practice, applied differently by many of the local authorities we spoke to, but which emerged as common themes: 1) regular and meaningful provider engagement, 2) early development of local formula or funding models and 3) confident use of in-year data, especially on child numbers.

3. Theme one: regular provider engagement

We know that local authorities work extensively to understand and engage with childcare providers in their local areas, and that positive relationships and meaningful provider consultation are essential to effective planning. The following examples show the approaches taken in different local authorities and the impact these arrangements have on local planning.

3.1 Blackpool Council

What approach do you take to ensure regular provider engagement?

Response:  

We have an early years provider reference group which has two council members that sit on it and three representatives from each type of provider – so three representatives from PVIs, three childminders etc. – we ask for nominations amongst the market for people to join this group and they join for a term of three years – they must be a director, a manager, or a senior decision-maker at their setting. The group has the remit to discuss sufficiency and funding practices, as well as a responsibility to consult with the rest of the market on behalf of the reference group – so, for example, PVI representatives will engage with other PVI providers in the area and feedback.

How does provider engagement affect the timeliness of announcing rates to providers?

Response:  

It does make it faster. We carry out our initial consultation with our provider reference group to prepare our approach ahead of time, we then get the final rates from DfE and will make tweaks to things like our central retention or other things we might want to alter, and then we’ll do a survey out to all our providers which is open for two weeks. The wider consultation does not often change our approach too much as it has already been agreed with the provider reference group. The consultation we do ahead of time is less about the actual figures of the rates and more about the principles of how we distribute the funding to providers, as there is not much the local authority can do to change the final rate from DfE. As so much of the work is done ahead of time, after our short consultation, our final rates are usually good to go, we then just need to wait for schools forum. One of the council representatives, and one of the provider group members are also members of schools forum and will consult with other school forum members as appropriate. There can be potential delays due to the schools forum not formally meeting between December and February and we overcome this by circulating proposals via email for agreement, and then minuting formal ratification at their next meeting.

What advice would you give to another local authority looking to implement a similar approach to regular provider engagement?

Response:  

If they were looking to create an early years provider reference group, my advice would be to have a good process in place in terms of selection which gives the opportunity for new people to get involved on a regular basis. Having a nomination process and having turnover after people have served a minimum term would help keep it fresh and allow different settings and providers to engage. I’d also advise not solely focusing on things like funding and sufficiency, but also to allow this reference group to be a space for providers to engage with each other and share best practice amongst themselves.

3.2 Lincolnshire County Council

What approach do you take to ensure regular provider engagement?

Response:  

We worked with an early years reference group in 2010 to develop our funding formula, to consider the costs associated with delivering childcare places and to ensure all element of expenditure were included in our model.

We also hold termly leadership and management briefings with the wider sector, and we found that we were getting a broader understanding and more feedback from these briefings. The reference group was not something we continued once the main formula was developed. These [termly] briefings are for sharing information with the sector and gathering feedback on issues and funding arrangements in general. We find that these briefings are enough, along with bespoke funding information that goes out through our ‘EYE’ bulletins, to keep in regular contact with the sector, and we only consult with them specifically if changes are going to be made to the funding system.  

How does provider engagement affect the timeliness of announcing rates to providers?

Response:  

We are only required to consult with the sector if we are making changes to our funding model and approach. We usually know ahead of the DfE rate if we’re planning to make changes. We’d consult with the sector to agree out approach ahead of time (for example, in the summer term) so that, when we get the rates from DfE, we have confidence that the approach we’ve taken to distributing funding to providers will be agreed by the sector and we’re able to produce provider level rates very quickly.

How did you build the relationships you have with providers in your area?

Response:  

Involving the sector is key, being open and transparent is important so that providers gain a better understanding of the funding system. Sharing as much information with the sector as you can helps avoid confusion, and it’s also important to get as much information from them around things like costs so that we can better inform our processes.

3.3 Peterborough City Council

What approach do you take to ensure regular provider engagement?

Response:  

We have an early years’ reference group that we meet with to discuss rates setting and finances. The Peterborough Provider Reference Group  aims to capture as many voices as possible from across the sector so that officers fully understand the wide range of local needs, especially when it comes to discussing rate setting and finances. The Early Years and Childcare Service actively consult with the wider sector when significant changes are being made to our local approach, or when there is significant change to the overall funding system. Given the short timescales that officers usually work to, it’s not always possible to consult with the full sector on every decision, and so a fully representative Early Years Reference Group works best for Peterborough City Council.

How did you build the relationships you have with providers in your area?

Response:  

The Peterborough City Council Provider Reference Group has been in place for some time now and considers the funding rates. This successful relationship is well established and early years and childcare officers receive honest and helpful feedback from sector attendees. As the Early Years and Childcare Service has created an open, honest and transparent forum, officers are also able to take the temperature within the sector to ascertain what local priorities should be. Due to the long-standing nature of this group, sector professional challenge has developed and matured, especially in relation to as financial proposals. Additionally, early years and childcare officers have developed and utilised a rates spreadsheet during meetings with our reference group. Officers can advise attendees as to current rates live and adjust aspects within the rates to show attendees what the impact would be. This approach has supported maturing of the trust, challenge and coproduction skills of the group which is of benefit to the children, families and the wider sector.

What advice would you give to another local authority looking to implement a similar approach to regular provider engagement?

Response:  

Have a reference group, 100%. The ability to consult, discuss key sector issues and receive ongoing feedback has been exceptionally valuable and is part of what has created a positive working partnership locally.  It is important to be transparent and to welcome all parts of the sector to the table when it comes to rates setting and agreeing the overall approach to how the funding is distributed and be willing to share information about the specifics of the formula.

4. Theme two: early formulae development

To determine local formulae and provider hourly rates, we know that local authorities carry out a range of work well ahead of DfE rates being announced in the autumn. For many of the local authorities we spoke to, a key aspect of this planning was ensuring that their local early years funding formula for the forthcoming financial year was prepared in good time, enabling them to respond quickly to the publication of DfE rates in the autumn.

4.1 Lincolnshire County Council

What process do you have in place to begin developing your local formulae ahead of receiving the DfE rates?

Response:  

We have a model in place each year – which is an Excel worksheet – which factors in things such as staffing costs for providers, so we’d look at things like national living wage, and other non-staff related costs, such as rent and rates, to try and determine the cost of delivering childcare for providers. This is all done ahead of receiving the DfE rate. There is some work required every year to update for things such as changes in business rates or the national living wage, but actually the formula itself is a very basic template – you put in the cost information, you put in the number of part-time equivalents (PTEs)  and then put in the rate that DfE give to us, input what you plan to put through special educational needs (SEN) inclusion funding, deprivation, contingency and the centrally retained budget and then it generates what an hourly base rate might look like for providers.

At what point in the year do you begin to develop this model?

Response:  

We look at any major changes, such as business rates and cost of living increases and we can predict changes to the national living wage until final announcements are made, so we can usually begin starting work on this during the autumn term. We continuously review information around take-up, population statistics and data and then start looking at forecasting for this financial year and budget setting for next financial year. We know we must do work ahead of receiving the DfE rate to get rates to providers as early as we’d like to, so prior planning and developing this model is the best solution to that.

Once you have inputted DfE rates into the model, what additional steps are required after this?

Response:  

We spend time reviewing the data and costs to make sure we’ve properly considered whether the funding is in the right place. We review the take-up levels, the distribution of the inclusion fund and any pressures we anticipate on that funding. There are also conversations at a higher level, for instance with the manager of special educational needs and disabilities (SEND), where we’ll discuss making adjustments to that area of the formula, adding slightly different amounts into the special educational needs inclusion fund (SENIF) pot to ensure it covers the demand on that budget. There are management level discussions on changes, contingency etc. Once those discussions have taken place, the rates are added to the schools forum report for their sign-off on the central spend. When reviewing central spend, we consider staffing costs and any increases that need to be added to the budget and once we’ve got the rate from DfE, we ensure we’re retaining enough centrally and ensure we meet the pass-through requirement.

What advice do you have for a local authority looking to develop a similar model to help them with early formulae development?

Response:  

You must involve the sector. We built our model with the sector so that we could understand what their staffing and non-staffing related costs were so that we could get a feel for that because, of course, that’s different all over the county in terms of business rates, rent etc – so I would encourage them to do that groundwork to help them develop their model. This would mean a local authority could take all of that information and see whether or not the rate they’re producing for providers would reasonably cover the cost of childcare per hour. I’d also say they’d need to consider the time it would take for their teams to develop something like this, maybe not every local authority would have the capacity to do that, but this is something we’ve built capacity for over a number of years.

4.2 Peterborough City Council

What process do you have in place to begin developing your local formulae ahead of receiving the DfE rates?

Response:  

We have a formula sheet in an Excel workbook which is based on hours. For the expanded entitlements, last year we had no data, so we used the indicative allocations from DfE. Normally we would look at the number of children that we had funded previously each term and take an average number of children over the year. We typically have more children in our system than we are funded for based on just the January census. We then plug these figures into the formula sheet which will then produce a rate for providers after we have factored in centrally retained spend and other things like that.

At what point in the year do you begin to develop this model?

Response:  

Officers start developing this at the beginning of the autumn term so that we can be ready for when DfE provide rates later in the autumn.

What advice do you have for a local authority looking to develop a similar model to help them with early formulae development?

Response:  

I would recommend a tool like this, not only from a planning perspective, but also because it allows officers to take this tool to local providers and reflect in real time what potential changes to different rates and supplements will do to different areas of funding. It is live and interactive. We can advise providers, for example, if there were another few pence on their 3- and 4-year-old rate, this is what it would do to their inclusion funding, or this is what it will do to another area of their funding. Officers are able to ask questions focusing on the kinds of supplements providers would like or if they would want to see funding go through the base rate. The tool is then able to reflect these changes in real time as well as the impacts. This plays a huge role in planning local rates and then working with providers to smoothly set rates, so this is something we’d absolutely recommend.

5. Theme three: use of ‘in-year’ data

We are aware that, as a minimum many local authorities take local headcounts on a termly basis, and some local authorities tend to take more regular headcounts through the year to inform their planning and adjust provider payments in-year. For many of the local authorities we spoke to, the regular headcount data was important in allowing them to develop provider level rates early. The following examples explain how some local authorities use in-year data to support their local rates setting process.

5.1 Kirklees Council

Do you use ‘in-year’ take-up data when modelling your rates? What prompted this approach?

Response:  

Yes, we use actual take-up data each term from the current calendar year when modelling the rates. This is more accurate than using the census data as the census is only once a year and take-up data varies across the three terms. In the first few years of the of the early years funding formula, we used January census data– so, for example, for the 2025 to 2026 rates we would have used the January 2024 census data. We found that this was not as accurate as using the termly take-up data, so we moved to using the three most recently available terms when it comes to the autumn when we’re looking to set rates.

Has using actual take-up data from the current year impacted how early you can announce funding rates to providers?

Response:  

I do not think changing from the January census data to the actual take-up data has helped speed up the process, it was a decision taken based on accuracy more than anything else, though I think that’s because we were using January census data from the current calendar year rather than from the forthcoming calendar year. If we waited until the January census data for the forthcoming year, this would have impacted on how quickly we could announce rates to providers – we do not have accurate census data until early to mid-March, so we’d be very delayed compared to when we announce now.

If another local authority was looking to switch away from using January census data and to use take-up data from the current year, do you have any advice for them?

Response:  

It depends on how accurate they’re finding their current process. If they’re using January census data and seeing that the accuracy is not quite there, by this I mean they have a large balance on their early years block budget at the end of the year, then I’d recommend trying a different approach, for example, moving over to using actual take-up data from each term in the year. It will vary from local authority to local authority, but this is the approach that we’ve found works best for us because the data we’re now using is reflective of actual take-up in the three most recent terms, hence more accurate than using the January census data.

5.2 Hillingdon London Borough Council

Do you use ‘in-year’ take-up data when modelling your rates? What prompted this approach?

Response:  

We’ve played around with different approaches – for some time we did use the January census data, but it was difficult to get this data in a timely manner. We also started to receive feedback from providers that the data we were using, as it was just a snapshot of one term, was not particularly fair. So, we gradually started to move towards using actual take-up data and, because take-up can vary so much from term to term, we opted to use the whole calendar year of take-up data rather than only the most recent term.

Has using actual take-up data from the current year impacted how early you can announce funding rates to providers?

Response:  

It’s very difficult to get hold of the January census data in a timely way. We’d have colleagues in finance chasing up the data, hourly rates would come out later in the spring term, we would have had queries from providers for some time asking what their hourly rates would be. Using January census data would not really be workable for our local authority. If we did not start the process of reviewing the formula and setting the rates until we got this data, then there would be a lot of manual chasing to get the information as soon as possible. There would certainly be a significant delay to when we announce rates compared to when we do now. I also think it’s worth saying that it’s not just about speed, it’s also about accuracy of data and fairness of looking at more than one term.

5.3 Lincolnshire County Council

You say you have a ‘live hub’ for providers, can you tell us a little more about this and why it is useful to your local authority?

Response:  

The ‘live hub’ is an online portal that providers in our area go onto every month and confirm their registers are accurate. There’s no need for providers to resubmit a claim for children, they simply click a button and confirm that their registers are accurate monthly. This is absolutely the best resource we have available in terms of data. We have a live number of hours being paid out every month. It takes out any guesswork where you’re anticipating a number and then reconciling at the end of each term, we’re as up to date as we can be with child numbers.

If another local authority was looking to switch away from using January census data and to use take-up data from the current year, do you have any advice for them?

Response:  

I’d strongly recommend trying to implement something like our live hub. If there was one data source that we’d encourage other local authorities to try and develop, it would be this. It is worth saying that there is both a time and a cost investment in developing something like this, and not every local authority will have the capacity to do this, but trying to put a system like this in place would be the most useful thing they could do in my opinion. The other thing is that it requires every provider to buy into it, we ran an extensive induction and training session on it and have every provider come along to ensure they were signed-up. It takes a lot of work, but it is worth it.