The Impact of Underfunded Childcare in the UK: Rising Costs and National Insurance Increases

Childcare in the UK has long faced a funding crisis, with parents, staff, and providers caught in the crossfire. Now, with the rise in National Insurance contributions and soaring staffing costs, childcare settings are under mounting pressure to remain viable. This article explores the underfunding of UK childcare, the financial challenges facing providers, and the potential consequences for families and the workforce.

The State of Childcare Funding in the UK

Childcare in the UK is a cornerstone of both family well-being and the economy. Yet, systemic underfunding has left many providers struggling to make ends meet. The government’s “free hours” schemes for three- and four-year-olds, as well as some two-year-olds, are often underfunded, leaving a gap that providers must bridge through increased fees or additional charges.

Key Statistics on Underfunding

     •           The Early Years Alliance reports that the average funding shortfall for the “free hours” provision is £2 per child, per hour.
     •           More than a third of nurseries and childcare providers are operating at a loss.
     •           Since 2015, over 3,000 nurseries have closed due to financial constraints.

This chronic lack of funding has created a fragile sector, where even minor cost increases can tip providers over the edge. Read more about how underfunded government free nursery place scheme is driving providers out of business.
 

The Role of National Insurance Increases

In the UK government’s 2024 Autumn Budget, a rise in employers’ National Insurance Contributions (NICs) was announced as a key revenue-raising measure. Starting in April 2025, the employer NIC rate will increase by 1.2 percentage points, from 13.8% to 15%. While the aim is to bolster revenue for the economy, it might have unintended consequences for childcare settings with increase in operational costs.

Impact on Childcare Providers

     •           Higher Employer Contributions: Providers must now pay increased National Insurance for their employees, significantly raising operational costs for childcare providers.
     •           Tighter Profit Margins: Many childcare settings already operate on thin profit margins, and these additional expenses further erode their financial stability.

Small, independent nurseries and childminders, which make up a significant portion of the sector, are disproportionately affected. Unlike larger nursery chains, they lack the financial flexibility to absorb these costs.

Staffing Costs: A Growing Challenge

Staffing is the single largest expense for childcare providers, typically accounting for 70-80% of operational costs. Recent years have seen sharp increases in these costs due to:

        1.      The National Living Wage: Regular increases in the National Living Wage mean providers must pay more to meet legal requirements.
       2.      Retention and Recruitment Challenges: With skilled childcare professionals leaving the sector for better-paid roles elsewhere, providers must invest more in recruitment and training.
       3.      Mandatory Pension Contributions: Employers are also required to contribute to workplace pensions, adding another layer of financial pressure.

A Workforce Crisis

The staffing crisis in childcare is not just a financial issue—it’s a systemic one. Low pay, high stress, and limited career progression make it difficult to attract and retain qualified staff. Without sufficient investment, the sector risks losing its most valuable resource: its people.

How Rising Childcare Costs Impact Families

The financial strain on childcare providers inevitably trickles down to families. As costs rise, many providers have no choice but to increase fees, creating a ripple effect:

Affordability Issues

     •           According to the Coram Family and Childcare Survey 2023, the average cost of a part-time nursery place for a child under two is £7,200 per year.
     •           Fee increases make childcare even less accessible for low- and middle-income families.

Reduced Availability

     •           Providers may reduce opening hours or limit the number of funded places available, further straining parents who rely on consistent childcare to work.
     •           Some settings may close entirely, leaving childcare “deserts” in their wake.

Economic Impact

When childcare becomes unaffordable or unavailable, parents—particularly mothers—are often forced to reduce their working hours or leave the workforce entirely. This not only affects household incomes but also has long-term implications for the UK economy.

Potential Solutions to the Childcare Crisis

While the challenges are daunting, there are actionable steps that could alleviate the pressure on childcare providers and families.

Increased Government Funding

     •           Fair Funding for “Free Hours”: The government must ensure that funding rates for the “free hours” schemes reflect the true cost of provision.
     •           Targeted Subsidies: Additional support for providers in low-income areas could help address childcare deserts.

Support for Staffing Costs

     •           Wage Support: Introducing a dedicated childcare wage subsidy could help providers afford competitive salaries without passing the cost onto parents.
     •           Training and Retention Programs: Funding for professional development could improve retention and attract new talent to the sector.

Tax Incentives

     •           Expanding tax relief for childcare providers could help offset increased costs, including National Insurance and pensions.

Long-Term Strategy

To create a sustainable childcare system, the UK needs a comprehensive strategy that views childcare as essential infrastructure, on par with education and healthcare.


The Bigger Picture: Why Childcare Matters

Investing in childcare is not just a moral imperative—it’s an economic one. High-quality, affordable childcare:

        1.      Supports Working Families: Enabling parents to work boosts household incomes and reduces reliance on benefits.
        2.      Promotes Child Development: Early years education lays the foundation for future learning and success.
        3.      Drives Economic Growth: A robust childcare sector supports job creation and enhances workforce participation.

Failing to address the challenges facing the sector risks undermining these benefits.

Conclusion: A Call for Action

The underfunding of childcare in the UK, combined with rising National Insurance contributions and staffing costs, has created a perfect storm for providers, parents, and staff. Without immediate action, the sector risks widespread closures, reduced access, and greater inequality.

To secure the future of childcare, the government must prioritize fair funding, workforce support, and long-term investment. Only then can the UK build a childcare system that works for everyone.