Chancellor Rachel Reeves used her first Budget to recommit to the expansion of funded childcare hours that her predecessor, Jeremy Hunt, announced in March 2023. The scale of that rollout means that total spending is set to rise by £1.8 billion next year - the same trajectory as Mr Hunt had set out. So it’s a big change, but not a new one.
The real impact for early years settings comes from how the Budget reshapes cost pressures, particularly around staffing.
Rising Employer Costs
The Budget brings major changes to employer National Insurance Contributions (NICs), with the rate increasing from 13.8 per cent to 15 per cent and the level at which NICs kick in lowered from roughly £9,100 to £5,000 per year.
These changes affect lower-paid workers most. For a typical full-time childcare worker earning £25,000, the employer NICs bill will jump from around £2,200 to nearly £3,000—a rise of over a third.
Public organisations like schools and colleges will be compensated for these higher costs, but private childcare providers won’t see similar support. Even though 80 per cent of pre-school childcare in England is on track to be publicly funded, it is still primarily delivered by the private sector.
National Living Wage Increases
From April, providers must also absorb a substantial increase in the minimum wage, rising by 77p per hour to £12.21. For workers aged 18 to 20, the increase is even steeper, with their minimum wage jumping to £10 an hour.
This will be welcome news for many early years professionals earning at or near the minimum. But it also represents a financial challenge for providers. Staffing accounts for roughly three-quarters of most childcare settings’ budgets, so a big rise in the minimum wage will have a substantial impact on costs.
A higher minimum wage also makes it more difficult for employers to ‘pass on’ their higher costs, in the form of lower wages. On average, around 60 per cent of the impact of the NICs tax rise will eventually be felt by workers, in the form of smaller pay rises and lower wages. But for childcare providers, many employees are already on or near minimum wage, making this adjustment much more difficult.
Offsets for Smaller Businesses
The government has introduced some relief by doubling the Employment Allowance, which will now provide a rebate on the first £10,500 of employer NICs. At the current minimum wage rate, that would allow an employer with four full-time minimum wage employees to pay no NICs.
Overall, the greatest impact of this Budget will be on businesses employing many low-wage workers. They’ll face increased staffing costs due to higher wages and NICs, while having a smaller portion of their payroll offset by the Employment Allowance.
Will Funding Rates Reflect Rising Costs?
The key question is whether government funding rates will increase to cover these new expenses. The Budget includes no extra resources for the childcare sector to compensate for higher wages or NICs. That means that any funding adjustments would need to be sourced elsewhere, adding pressure to broader fiscal plans.
The early years sector has seen a big increase in funding recently, including funding rates for the new entitlements for two-year-olds and under-two’s that are much higher than the average price they charge parents. But the Budget’s changes will add pressure, especially for larger settings. The upcoming spring Spending Review will be a crucial test to see how the government will approach this.
