From the 2015-16 financial year, the Department for Education (DfE) wants to move away from funding the free entitlement on estimates of the number of children who are eligible for a free place and use participation-based funding instead.
This will mean that the DfE will fund local authorities according to the actual numbers of eligible two-year-olds taking up a place, the same way that three- and four-year-old places are funded.
Places would be funded on the basis that a two-year-old is taking up the full 15 hours entitlement a week, the part-time equivalent (PTE) of 570 hours a year.
If two eligible children between them are taking 15 hours, this equals funding for one place (see diagram).
The amount of funding a local authority receives is dependent on the number of PTEs multiplied by the free entitlement hourly rate, which is £5.09 per child on average.
The proposed move comes ahead of the expansion of the programme from 20 per cent to 40 per cent of the most disadvantaged two-year-olds from this September.
The consultation document states that moving to this way of funding provides an incentive for local authorities to grow and sustain a high level of take-up. It also enables funding to be targeted where it is needed.
The DfE proposes undertaking two data collections for the first year of participation funding, as it says that it is unlikely that take-up levels for the programme will have stabilised by the time the first count is taken.
The first data collection will take place in January 2015 via the school and early years censuses to determine funding allocations for June 2015.
The second data collection is for 2015-16 only. It will take place in October 2015 and will be used to adjust funding allocations in December 2015, for those local authorities whose take-up levels have substantially increased.