The Funded Childcare Expansion: Opportunities (and Risks) for Early Years Settings in 2026

The expansion of government-funded childcare to babies and toddlers from nine months is the most significant structural shift the UK early years sector has seen in decades. It has created genuine opportunity for settings that can meet the demand — and genuine risk for those that expand without the right foundations.

This post is for managers and leaders who are asking whether, and how, to grow their funded provision.

The opportunity

The demand side of this equation is straightforward. Working parents of babies and toddlers have historically paid the highest childcare costs of their working lives during the first few years. Government-funded hours now reach into this group, meaning more families can afford nursery provision, and are actively looking for places.

For settings with the physical space, the staffing headroom, and the administrative infrastructure to absorb younger funded children, this is a real opportunity to grow occupancy, stabilise income, and expand the service they offer families.

The risks

The risks are equally real, and they catch settings out in predictable ways.

Staff ratios are more demanding

Under-twos require 1:3 ratios (for children under two) versus 1:4 for two-year-olds and 1:8 for three-and four-year-olds. Taking on 10 funded babies doesn't just mean 10 more children — it means significantly more staff hours, likely at your highest-qualified level.

Before accepting funded places for babies, model your staffing requirements precisely. The additional funded income may not cover the true staffing cost without other cross-subsidies.

Your physical environment may need investment

Under-twos have specific environmental requirements: sleep rooms, nappy changing facilities, appropriate floor space, access to outdoor space with suitable surfacing. If your setting wasn't built with babies in mind, meeting these requirements may involve capital investment.

Funding rates for under-twos vary

Local authorities set their own funding rates, and they vary considerably. The hourly rate for a funded baby is typically higher than for a funded 3-year-old, but it needs to be, because the staffing cost is higher. Not all local authority rates are set at a level that covers the full cost of provision. Model the actual financials carefully before committing.

Administration is more complex

Funded places for babies and toddlers involve parental eligibility codes, reconfirmation deadlines, and headcount processes — exactly as for older funded children. With more funded age groups, the administration multiplies. A setting that struggles to manage funded admin for 3- and 4-year-olds will struggle more with the added complexity of funded places across multiple age groups.

A framework for deciding whether to expand

Before taking on funded places in a new age group, answer these questions honestly:

Demand

• Is there genuine local demand for funded places in this age group that is currently unmet?
• Are existing families asking for this, or is this a speculative move?

Staffing

• Do you have qualified staff available who are both experienced with this age group and content to work in baby rooms?
• Can you recruit more if needed, at a realistic wage, in your area?
• What does your staffing model look like at full capacity vs half-full?

Facilities

• Does your environment meet the requirements for this age group without significant investment?
• If investment is needed, what's the payback period and can you fund it?

Finance

• What is your all-in cost per funded hour for this age group?
• What is your local authority's hourly rate?
• At what occupancy level do you break even?
• How long before you reach that occupancy level?

Administration

• Do you have systems in place to manage the increased complexity?
• Who owns the admin processes for funded places, and do they have capacity?

If you can answer these confidently, you have the basis for a sound decision. If several of the answers are uncertain, those are the areas to work on before committing.

What successful expansion looks like

Settings that have expanded their funded provision successfully share some common characteristics:

• They started with a pilot cohort (e.g., 4-6 funded babies in an existing room) before committing to full expansion
• They invested in the administrative infrastructure before growing — systems that handle multi-age-group funding claims, not spreadsheets bolted together
• They communicated their new offer clearly to existing families and waited-list families before looking further afield
• They tracked their actual cost per funded hour closely and adjusted their non-funded fees accordingly

The funded childcare expansion is a tailwind for the sector, but it doesn't make expansion risk-free. Thoughtful, well-costed expansion is sustainable. Reactive expansion driven by the fear of leaving money on the table often isn't.

The role of technology in managing expanded provision

As your funded provision grows, the administrative demands grow with it. Managing eligibility codes and reconfirmation deadlines for two age groups is twice the admin of one. Managing the different funding rates and headcount processes for three age groups is more complex still.

Settings that are growing their funded provision need systems that grow with them — not systems that require more manual work for every new funded child added.

That's a big part of what we've built at Early Tree. Our funding portal connects your nursery register to your funding claims, handles multiple age groups and funding streams, and automates the reminder and validation steps that are easiest to miss.

Learn more about our funding tools → | Join Early Tree and help shape what we build next →