Informal childcare executive summary

Quality costs: paying for Early
Childhood Education and Care
Kate Goddard and Emma Knights
Report series funded by
Final report

Quality costs: paying for Early Childhood
Education and Care
Kate Goddard and Emma Knights
Acknowledgements
Daycare Trust would like to thank the Nuffield
Foundation for funding this research project. Thanks are
also due to the Social Market Foundation (in particular
Sandra Gruescu) and the Institute for Fiscal Studies
(Mike Brewer) for their work on this project; members
of the Advisory board; and participants at the
roundtables. For more details of the Advisory board and
roundtables, please see Appendices A and B.
The Nuffield Foundation is a charitable trust with the
aim of advancing social well-being. It funds research
and provides expertise, predominantly in social policy
and education. It has supported this project, but the
views expressed are those of the authors and not
necessarily those of the Foundation. More information
is available at www.nuffieldfoundation.org.

Contents
Chapter 1: Introduction 3
Chapter 2: What is high quality early childhood education and care? 6
Chapter 3: What is the cost of quality? 13
Chapter 4: What parents currently pay 18
Chapter 5: Current government spending on early childhood
education and care 21
Chapter 6: Funding options for high quality early childhood
education and care 28
Chapter 7: Conclusions and recommendations 39
Appendices 44
A. Advisory board members
B. Roundtable attendees
References 45
Quality costs: paying for Early Childhood Education and Care
02

03
The Government’s vision, outlined in its Ten Year Strategy
on Childcare,1
included the ambition that in future early
childhood education and care (ECEC) provision in this
country will be among the best in the world with a better
qualified workforce; more workers trained to professional
level; greater involvement of parents in planning and
delivering services; and reformed regulatory and
inspection systems. This vision marked a very significant
step in the aspirations for ECEC, and has been followed
by an expansion of provision. Although the quality of this
available provision is improving, it is still variable and
there is some way to go to achieve high quality ECEC for
all pre-school children. Daycare Trust has always insisted
that quality is one of the foremost necessities of early
years provision but, while great strides have been made
in expanding services, it is now generally accepted that
quality remains the last piece of the jigsaw to be fully
addressed. Indeed quality has risen to the top of both the
policy and practice agendas. There is now a large body of
work on improving quality of provision – which will be
reviewed here – but there has, until now, been no attempt
to quantify the cost of improving quality to a consistently
high level. This project aims to bring the work on quality
and sustainable funding together.
The aim of the Quality costs project is to identify the
elements required for high quality provision of ECEC and
to establish and cost a high quality model. Crucially, the
current costs and levels of funding for ECEC are
identified, and funding options for the high quality
model are explored in depth, to identify ways in which
ECEC can be subsidised to ensure that the costs do not
become prohibitive for parents.
Background
The last decade has seen an increased focus on ECEC
from the current Government, both in terms of its
funding and quality improvement. Prior to 1997, ECEC
was mainly seen as a private matter, with patchy access
depending on where families lived and how much they
could afford to pay. Since then, a number of policy
initiatives and strategies have been established to
improve the quality, availability and affordability of ECEC.
In 2004 the Government published its ten year strategy
for childcare, Choice for parents, the best start for
children.2
The themes of the strategy were choice and
flexibility, ensuring availability, building quality and
affordability. This outlined a number of policy initiatives to
improve the quality of ECEC services, such as: a
children’s workforce strategy to provide a new
qualification and career structure; a £215 million
Transformation Fund to raise the quality and sustainability
of childcare; partnership working with children’s centres
and a reformed regulatory framework and inspection
regime. It also committed to extending the free early
education places to 15 hours per week for 38 weeks per
year by 2015, with a long-term goal of 20 hours per week.
The childcare strategy was followed in 2006 by the
Childcare Act,3
which took forward a number of the
provisions in the ten-year childcare strategy and
enshrined them in law. Local authorities now have legal
responsibilities to survey local need and ensure
sufficient places are available, and are required to
improve outcomes for all pre-school children and reduce
inequalities between children. High quality ECEC is an
important element in this. The Childcare Act also
introduced the Early Years Foundation Stage (EYFS),
which sets the quality framework and welfare
requirements expected of ECEC providers.
Alongside these specific developments in ECEC, the
Government has also committed to ending child poverty
by 2020. This will entail getting more parents into work,
as well as improving social mobility and high quality
ECEC as a prerequisite to achieving both of these
ambitions. Indeed, a key feature of countries that have
been able to break the link between parental income
and that of their children is high quality and highly
subsidised ECEC.
Five years on from the launch of the childcare strategy,
most of the policy initiatives related to quality
improvement have been implemented, at least partially.
These include:
● Reform of the ECEC workforce, led by the Children’s
Workforce Development Council, including:
◗ a commitment to a graduate-led workforce in all full
daycare settings by 2015;
◗ creation of the Early Years Professional Status (EYPS);
1. Introduction

04 Quality costs: paying for Early Childhood Education and Care
◗ a new single qualifications framework; and
◗ the Graduate Leader Fund (following on from the
Transformation Fund).
● A new regulatory framework and inspection regime
(through Ofsted) for all ECEC services.
● A single quality framework –the EYFS (see above) –
providing an integrated approach to care and
education and setting the national standards for
learning and development from birth to five.
England has adopted a market approach to ECEC, with
private, voluntary and independent sector providers
operating alongside maintained sector provision. For
example, the majority of full daycare is privately run, with
66 per cent privately operated in 2007, and 21 per cent
run by a voluntary organisation. Full daycare in children’s
centres is more likely to run by a local authority (49 per
cent). However the Government recognised that market
forces alone would not produce the kind of childcare
market envisaged in the strategy, so has therefore
played an active role in the market, for example, by
providing funding to create new places (particularly in the
most disadvantaged areas) and to improve quality. Local
authorities have a key role in managing the market, and
as mentioned above have a statutory responsibility to
ensure sufficient childcare is available in their area for
working parents. This will involve supporting existing
providers to remain sustainable, and/or establishing or
commissioning new provision where appropriate.
As noted above, quality is one of the key considerations
in the 10-year strategy and is essential in improving
outcomes for children. Figures from Ofsted indicate that
around 60 per cent of ECEC settings are judged good or
outstanding. The number of good and outstanding
settings is higher in nursery schools and classes, with
ten per cent of settings judged outstanding compared
to five percent of childcare settings.5
Overall, around
three percent of settings are judged inadequate (only
one per cent of nursery schools and classes), and
Ofsted reports that the main weaknesses include
insufficient rigour in checking staff suitability, insufficient
attention to risk assessment, and a lack of procedures
and records for safeguarding children.
Progression towards improved quality in ECEC is taking
place, but slowly, and the pace of change is slower than
that in other countries (for example, New Zealand – where
childcare provision started from a similar basis in the late
1990s – has moved much more quickly to a system of
graduate-led ECEC settings, with financial incentives,
such as higher rates of funding, for settings to improve
quality). In England, for example, 75 per cent of all paid
staff in full daycare hold at least a Level 3 qualification,
compared to 72 per cent in 2006 and 57 per cent in 2003;
and 7 per cent hold at least a Level 6 qualification,
compared to 4 per cent in 2006.6
So England is still some
way from having a fully qualified workforce and only a
very small percentage are graduates; despite the efforts
being made to train Early Years Professionals (a graduate-
level status for those working in ECEC) there are issues of
pay, conditions and parity with Qualified Teacher Status
which are yet to be resolved.
Therefore, as high quality provision undoubtedly has a
cost attached to it, this project examines whether
enough has been spent to achieve the level of quality
that is needed to deliver the best possible provision and
therefore the best outcomes for children.
Scope and limitations
It is a known fact that parents and the home environment
have the largest impact on a child’s development. The
quality of the home learning environment and the
interactions between a parent and child plays a more
significant role in producing better child outcomes than
parental income, mothers’ qualifications and social
class.7
Evidence also suggests that parental intervention
in children’s programmes produces modest positive
effects on children’s cognitive development.8
However
this project is concerned with the quality of formal ECEC,
and not that provided at home.
Daycare Trust has had to restrict the project to group
care. It has not been able to consider the quality and
cost of childminders, as there is not the same evidence
base to enable discussion of high quality childminding in
the same way. Childminders also have a very different
cost basis which is not analysed here. This is not to say
that childminders don’t have an important role in ECEC
or don’t need to be of high quality; on the contrary, they
have a very important role to play and are the first
choice for many parents. Likewise, this project
concentrates on pre-school provision and does not
explore other elements of the childcare market, such as
out-of-school clubs or holiday playschemes.
The Quality costs project uses the Childcare and Early
Years Providers Survey published by the Department for

Children, Schools and Families (DCSF) to form the basis of
the modelling of current costs, which are then compared
to the costs associated with Daycare Trust’s high quality
model (see Chapter 3). As the DCSF survey is limited to
providers in England, research for the project has similarly
limited its scope. Furthermore, ECEC is a devolved matter,
and therefore the relevant policies adopted vary
considerably between the different UK countries, which
would have added significant complication to the project.
However, Working Paper 5 and Chapter 6 of this final
report do consider the estimated costs to government at a
UK level, by applying the Barnett formula.
Methodology and project partners
In order to achieve the aims of the project, Daycare Trust
worked with the Social Market Foundation (SMF) and the
Institute for Fiscal Studies (IFS). Their expertise in financial
modelling has been critical to the success of the project.
The project began with a literature review of the nature
of quality ECEC. This was backed up by interviews with
key stakeholders and a roundtable discussion. The SMF
worked with Daycare Trust’s high quality model and the
datasets from the 2007 Childcare and Early Years
Providers Survey to identify the current costs associated
with the model, as well as the high quality costs which
would arise from increased staff qualifications and pay.
The IFS then undertook a quantitative analysis of
different policy options that help meet the total cost of
providing high quality ECEC, considering the financial
impact on government and parents. Their analysis also
considers the distributional impact on families with
children. This involved modelling using the IFS’ micro-
simulation model, TAXBEN.
The project team was supported by an advisory board,
which included academics, researchers and childcare
experts, in addition to representatives from the DCSF,
HM Treasury and the Children’s Workforce Development
Council. Membership of the advisory board is detailed in
Appendix A.
Two roundtables were held as part of the project. The first
was held in October 2008 to discuss the research on
quality and to identify any areas of research that had not
been identified. This roundtable helped to develop the
components of the high quality model, and confirmed the
need to approach the model with a view of integrated
childcare and early years education, rather than seeing
two different tiers or types of care. The second roundtable
was held in September 2009, near the conclusion of the
project, to give an opportunity for discussion on the
findings of the project; the level of spending that would be
required; and the potential funding mechanisms to ensure
that costs did not rise beyond a level that parents could
afford. Organisations represented at the roundtables are
detailed in Appendix B.
Detailed description of the methodology and outputs
from the different stages of the project are available as
five working papers to accompany this final report:
● Working Paper 1: What is high quality early childhood
education and care?
Maxine Hill and Emma Knights, Daycare Trust
● Working Paper 2: What is the cost of quality?
Sandra Gruescu, Social Market Foundation
● Working Paper 3: What do parents pay?
Kate Goddard and Jonathan Rallings, Daycare Trust
● Working Paper 4: International comparisons of high
quality early childhood education and care
Sandra Gruescu, Social Market Foundation
● Working Paper 5: Funding options for high quality
early childhood education and care
Mike Brewer, Institute for Fiscal Studies
Structure of the report
This final report of the Quality costs project brings together
the one-year research project and summarises the
information from the five working papers. The report firstly
addresses the issue of quality and reviews the relevant
literature, summarising the different factors necessary for
high quality ECEC before outlining Daycare Trust’s high
quality model. Chapter 3 discusses the cost calculation for
the high quality model and compares those costs to the
current situation. Chapters 4 and 5 discuss the current
levels of funding for ECEC in England, firstly from fees
charged by providers and secondly from Government
subsidies. Finally, in Chapter 6 we discuss the finance
required to fund the high quality model and explore the
different options for allocating funding. Chapter 7 contains
our conclusions and recommendations for taking the
results of this project forward.
05

The first working paper explores in detail what is meant
by good quality early childhood education and care
(ECEC) and examines the factors that determine quality.
It proposes a ‘high quality model’. The briefing paper
draws on three sources:
1. A review of the literature from existing research on
ECEC quality.
2. Interviews with key stakeholders including the
Department for Children, Schools and Families
(DCSF), Ofsted, childcare providers’ representative
organisations and two local authorities.
3. A policy roundtable with subject experts, policy
officials and representatives from the childcare sector.
Defining quality
It is universally accepted that children should receive a
good quality service in early years provision; yet,
perhaps not surprisingly, there is no common agreement
of what that means and no single definition of what
quality ECEC is. Many researchers have argued that a
single universally accepted definition of ‘quality’ is
unachievable as it is value-based and subjective.
It is apparent that the understanding of what constitutes
‘high quality ECEC’ differs depending on the individual’s
perspective. For example, parents, children, ECEC staff and
managers, local authorities and politicians approach ECEC
with diverse attitudes and differ in their view of what ECEC
might be expected to deliver. Interviews with stakeholders
identified that bringing together these diverse views was
important and the working paper achieves that objective.
What is high quality ECEC aiming to
achieve?
There are a number of different aims that are prioritised
by different stakeholders, with the emphasis varying.
These include:
● ensuring children are ready for school by developing
good literacy and numeracy skills;
● making sure children are safe and healthy;
● keeping children happy and engaged in activities they
enjoy;
● ensuring children have good behaviour and are well-
adjusted;
● closing the attainment gap between disadvantaged
children and their peers; and
● enabling both parents to be in paid work.
The different definitions of quality reflect the various
aims of ECEC held to be most important by diverse
groups, and the international evidence shows that quality
is measured differently in individual countries depending
upon the cultural values and constructions of childhood.9
Positive child outcomes
As noted by the Organisation for Economic Co-Operation
and Development, positive child outcomes are a major
goal for ECEC in all countries, but what differs is which
outcomes are deemed to be more important. For
example, the UK – as in many other English-speaking
countries and in France – prioritises outcomes that lead
to children being ‘school ready’.10
Whereas countries
such as Denmark, Sweden and Norway come from a
social pedagogy tradition which combines care,
upbringing and learning, without hierarchy and with a
focus on preparing children for life more broadly rather
than focusing on school-readiness. A further example of
a different model of provision based on a different set of
cultural values and views on childhood is that in the
Reggio Emilio region in northern Italy. Children there are
considered as able to think and act for themselves in
order to make meaning of their own experiences. ECEC
workers therefore use an approach that takes into
account those children’s interests, experiences and
choices. The value placed on certain outcomes
influences how services are developed as well as the
way in which quality is defined and measured. The
Reggio Emilio approach is now widely written about and
drawn on by many practitioners but it is not yet central to
the approach taken in this country to measure quality.
Identifying high quality in settings
Despite the emphasis in Working Paper 1 covering the
outcomes for children, it is appreciated that an
06
2. What is high quality early
childhood education and care?

outcomes-based approach is not the only way in which
quality of ECEC can be defined or identified. Other
measures include:
● Observational rating scales used by trained
researchers and, increasingly, by practitioners.
● Expert judgements from inspectors or advisers (such
as those used to ensure national standards are
maintained)11
– see the section on ‘Ofsted’ in Working
Paper 1.
● Frameworks which provide a practical way of allowing
the various different stakeholders to share and
develop mutual understanding of the quality concept.
What can be measured?
Research on the impact of ECEC is rightly dominated by
what is beneficial to children.12
The evidence in the, now
substantial, body of empirical research shows that good
quality ECEC is associated with better child outcomes,
usually in future years (for example, school-readiness and
beyond). Sylva and Roberts refer to a child-outcome
approach to defining quality as a ‘post-hoc’ one as quality
judgements are made retrospectively.13
While there is an
excellent body of evidence on some later ‘outcomes for
children’, there are no measures of the experiences of
children in the provision – for example, their happiness
and engagement. Do they enjoy their time in childcare?
There is a body of thought attempting to bring this
approach, often linked to Emilio Reggio in Italy and
based on a children’s rights philosophy, more centrally
into the discussion of quality.14
Daycare Trust is aware in
carrying out this piece of work that the lack of empirical
evidence from this point of view – on the ‘here and now’
experience for children – makes the task more difficult.
The impact of ECEC on children
There is now a large body of evidence – from the UK, the
USA and many European countries – that has examined
the impact of ECEC on children.15
(The impact of ECEC
on children is discussed in detail in Working Paper 1.16
)
Melhuish provides a substantial overview of the
international research and concludes that the research is
consistent in demonstrating a positive relationship
between ECEC from three years onwards and
intellectual, social and behavioural development, and that
the effects are greater for high quality provision.17
The
benefits are varied and include improvements in
children’s confidence, peer relationships and behaviour;
their learning and development; and also a contribution
to breaking inter-generational disadvantage and poverty.
However these benefits are highly dependent on the
quality of provision. Research also shows that poor
quality ECEC provision is no more beneficial to the child
than where there is no provision at all. Conversely, high
quality ECEC produces better outcomes for children, and
the outcomes most often associated with high quality
provision were summarised by Melhuish.18
In the UK, the largest and most widely cited study is the
Effective Provision of Pre-School Education (EPPE)
project which showed a significant link between higher
quality provision for children from age three and better
intellectual and social/behavioural outcomes when
children enter school.19
Furthermore the advantages can
last a substantial amount of time, continuing throughout
primary school. The EPPE project confirmed that
disadvantaged children in particular have much to gain
from ECEC provision; use by disadvantaged children
produces positive cognitive, language and social
development as long as the quality of provision is high.
Full-time attendance led to no better gains than part-
time attendance – once 15 hours a week is reached
there are no further improvements in outcomes for
children. Both the EPPE project and the evaluation of
the Neighbourhood Nurseries Initiative (NNI)20
showed
that the benefits of good quality pre-school settings for
disadvantaged children are particularly significant where
they attend with a mixture of children from different
social backgrounds.
Research on children under three-years-old is less
prevalent and less conclusive than that for the older age
group. Some studies on the impact of ECEC for the
under threes find positive effects, some find negative
effects and some find no discernible effects at all.
Overall the research suggests that the quality of the care
received and the number of hours spent in childcare
both affect the outcomes for children. Melhuish’s review
for the National Audit Office concluded that, for children
who are not disadvantaged in their home environment,
use of high quality childcare in the first three years has
no strong effects upon cognitive and language
development. However disadvantaged children are likely
to benefit from high-quality provision in the first three
years, with positive outcomes in language, cognitive and
social development.21
Disadvantaged children benefit
from high quality ECEC whether started in infancy or at a
later age, and the greater the number of months attended
the better the outcomes. High quality centre-based care
07

may facilitate in particular children’s language
development, but where ECEC quality is low, children
can show lower language development than those not
attending ECEC provision during the first three years.22
This demonstrates just how critical quality is in the
development of ECEC.23
This has been recently
confirmed by the evaluation of the early education pilots
for two-years-olds which concluded that the overall lack
of a significant impact disguises the fact that children
who were in high quality provision showed significant
improvements in their vocabulary, as well as
improvements in parent-child interactions.24
The DCSF
has since refined the criteria for the free places for two-
year-olds to require settings to be judged ‘good’ or
‘outstanding’.
There is some suggestion from other sources that long
hours in childcare provision from an early age can lead
to slightly increased externalising behaviour (aggression
and disobedience) irrespective of quality.25
Melhuish
concluded in 2004 that long hours of group care among
non-disadvantaged children aged under two may
increase the risk of developing anti-social behaviour.
Some studies define long as more than three days/20
hours per week and others found negative effects only
above 35 hours of group care per week. Contrary to
some coverage in the press the studies show the
increased poor behaviours are very small and, unlike the
positive effects of high quality ECEC, may not last over
the years. Additionally in practice very few children in
the UK actually experience long hours in group care,
especially under the age of two or even at age two.26
Furthermore, a recent UK study using Millennium Cohort
Study data on childcare use and working mothers
concluded that group setting use by a nine-month-old
baby is positively associated with school readiness
scores at the age of three, and found no association
between that use and poor behavioural outcomes.27
Quality factors: process and structure
Much of the research on ECEC draws a distinction
between ‘structural’ and ‘process’ aspects. Melhuish’s
review of the literature on the impact of ECEC defined
these two aspects as:
● Process dimensions – which are ‘the characteristics of
the child’s experience e.g. interactions with others,
learning experiences, variety in stimulation,
responsiveness in environment’.
● Structural dimensions – which focus on ‘aspects of
the environment that are fixed, e.g. accommodation,
group size, adult-child ratio, training of staff, health
and safety, stability of staff, management structure’.
Structural aspects tend to be focused on areas where
legislation of daycare quality exists, as these are easier
to inspect and control.30
Process factors have been
explored widely in other research,31
and are clearly
fundamental to delivering high quality ECEC. Research
evidence suggests that the quality of provision for the
under threes relies on affection, communication,
responsiveness and continuity. The relationships children
have with both adults and other children – and the nature
of the interactions between them – are crucial. For
children aged over three, the learning opportunities and
education aspects of provision also become increasingly
important.32
EPPE showed that key quality indicators
included warm interactive relationships with children, as
well as having a trained teacher as manager and a good
proportion of trained teachers on the staff.33
However, when looking at the financial implications of
high quality ECEC, process factors do not appear to
have a price tag attached to them which are separate
from any structural issues. No stakeholder suggested
any additional costing associated with improving the
process factors, apart from training costs. The failure to
explore the issues surrounding the ‘process’ aspects of
quality in the project is not due to a lack of appreciation
of their fundamental importance, it is simply that – as
this project is chiefly concerned with how funding can
be used to improve the quality of early years provision –
the overriding objective is to explore how financial
investment could lead to an improved quality of
provision, and it is the ‘structural’ aspects that directly
require additional funding. However it is likely that the
improvement brought about by structural factors will act
through improving the process factors. As Melhuish
observed:
‘Structural factors seem to provide the necessary
conditions for process quality such as positive
staff/child interaction. They facilitate but do not
guarantee good quality experiences for the child.’34
Quality factors and the stakeholder
discussions
Daycare Trust undertook a number of stakeholder
interviews as part of the research (see Working Paper 1
08

for the organisations involved). All interviewees
identified that the workforce was the main crucial
aspect in determining quality, and that qualifications
and reflective practice needed to be improved. A
management approach based on understanding and
promoting quality through the whole organisation was
seen as critical.
When discussing the research that indicates that the
maintained sector has higher quality provision, all the
interviewees indicated that it was important to drill down
into this finding to see what it is about the maintained
sector that brings quality. Interviewees suspected that
the key to this is the workforce and their qualifications,
training and status, although some mentioned better
premises found in the maintained sector.
The Early Years Foundation Stage, and its bringing
together of care and education, was welcomed and
seen as a step forward.
Quality factors and the research
evidence
Here we summarise the structural factors associated
with quality in the three main studies on ECEC that have
been carried out in England over the past decade:
● the EPPE study;
● the NNI evaluation; and
● the Millennium Cohort Study (MCS).
There are no studies which contradict these findings,
and others add weight to the conclusions that these are
the structural factors which influence quality (for
example, Jane Waldfogel has identified that staff-child
ratios and education level of staff are key35
). For further
information, see Working Paper 1.36
Sector
The evidence from a number of studies suggests that
maintained status is a strong predictor of quality. For
example, EPPE found that, while good quality can be
found across all types of early years settings, at the time
the study was conducted quality was found to be higher
overall in nursery schools and in settings with integrated
care and education.37
Both the NNI evaluation and the
MCS found children’s centre status to have a positive
impact on the quality of provision, with both showing it
to be a stronger influence than sector on some issues,
whereas on others the impact may be because most are
in the maintained sector.38
However it is not possible from those studies to
ascertain the additional expenditure which leads to the
observed higher quality. In the MCS some of the effects
were only apparent after staff qualifications were
removed from the regression model, suggesting that
qualifications could be influencing the higher quality
obtained by the maintained sector.
Group size and size of centre
There are contradictory findings with these two factors.
Although earlier studies has found smaller groups
produced better outcomes,39
the MCS found that rooms
with larger groups of children present were of the highest
quality once other factors had been taken into account.
Similarly, the MCS found that larger centres produced
lower outcomes – although the NNI evaluation found the
opposite.
Staff and manager qualifications and
training
There is much evidence to show that staff qualifications
and training are key indicators of quality. In a briefing
paper for Daycare Trust in 2004, Melhuish identified six
factors related to staff characteristics that support
quality childcare:40
1. higher levels of staff education;
2. in-service training;
3. staff experienced in working with children;
4. low staff turnover;
5. adequate staff pay; and
6. a trained centre manager to provide staff support and
supervision.
The EPPE study found that the most effective ECEC
provision – ie that which produced better outcomes for
children and had higher quality scores – had highly
qualified staff (mostly graduate teachers).41
The MCS
report also found staff qualifications – including those of
the manager – to be a strong predictor of quality, which
had a strong impact on children’s academic progress,
developing language and interactions.42
The NNI
evaluation also highlighted the importance of a well-
qualified workforce – including access to a trained
teacher – for the provision of high quality caregiving and
for child outcomes.
09

Stability of staff group
A low turnover of staff contributes to high quality. The
importance of consistency of care has been highlighted
by a number of commentators.43
Melhuish, summarising
research on investing in quality childcare, said:
‘This issue of staff retention is critical to the quality of
childcare. Indeed, without low staff turnover consistently
good quality childcare becomes impossible.’44
Pay
There is little research directly exploring the relationship
between staff pay and the quality of ECEC. The exception
is a study conducted in the USA by Deborah Phillips et al
which explored a range of quality indicators in centre-
based childcare in 104 centres in Massachusetts, Virginia
and Georgia.45
The study found that the quality of
provision was more strongly associated with the wages
of staff, and particularly the highest wage paid to full-time
teachers, than any other structural dimension of care.
What is less understood is why staff wages play such a
strong role in the quality of provision. It could be
speculated that higher staff wages first increases the pool
of candidates for jobs and then staff retention,
contributing to the stability of care for children and
helping to drive up quality. Qualitative work with childcare
practitioners concluded that the perpetuation of low pay
undermines efforts to raise the quality of the ECEC
workforce and the services it provides.46
Ratios
The research evidence suggests that higher staff-child
ratios (fewer children per member of staff) are associated
with better quality care and consequently better outcomes
for children.47
However, the interdependency of ratios with
other quality indicators means that ratios should not be
treated in isolation. For example, the lower ratios found in
nursery schools and classes do not necessarily result in
poorer quality, as the impact of sector type and staff
qualifications tend to result in higher quality ECEC.48
International evidence reviewed by Mooney et al for the
Department for Education and Skills in 2003 cited the
example of ECEC in France where poorer ratios were
offset by staff qualifications and training, as well as warm
staff/child interaction.49
More staff per child can improve
the nature of interactions, but again this is not the only
factor in determining adult-child relationships. Another
international review of the international evidence also
included staff salaries as one of the elements to which the
impact of ratios was ‘inextricably linked’.50
It argued
strongly that making ratios dependent on staff
qualifications and group size could provide a real incentive
to drive up the quality of care, because providers could be
more easily persuaded to employ better skilled staff if
those staff could in turn care for more children.
Age range
Both the NNI evaluation and the MCS found that the
overall quality of provision is higher where older children
were cared for alongside younger children. The NNI
evaluation, which particularly focused on provision for
children aged under three and a half, found that mixed-
age rooms produced better cognitive outcomes but
slightly worse behavioural outcomes. It found that
younger children in a mixed-age room benefited
educationally from the presence of older children as
they experienced educational activities and higher level
communication intended for the older children.
However, there was a weak but significant effect on
younger children’s worried and upset behaviour (using
the Adaptive Social Behaviour Index (ASBI) item 4 for
example: frowning or stamping their feet).
Premises
All reviews included premises as one of the structural
aspects of quality – for example Melhuish included ‘safe
and appropriate physical space’ alongside the six staffing
factors above. Furthermore, it is widely accepted in the
sector that outdoor play is an important element of the
experience of children; although outdoor space is not a
requirement in the EYFS.51
However there is no research
literature that we can be drawn on to help in the task of
directly relating premises to the outcomes of children.
Interaction of these factors
As mentioned earlier, the researchers have pointed out
that there is a complex interdependency between
factors such as staff qualifications, ratios and the quality
and type of provision, which suggests that it could be
more useful to consider the impacts of packages of
provision rather than trying to identify the impact of a
specific factor.52
This confirmed earlier conclusions that
the three factors of staff qualifications and training;
group size; and staff-child ratios work together, rather
than operate independently, to have a positive influence
on children’s outcomes.53
010

Daycare Trust’s high quality model
Based on the strong evidence reviewed above, Daycare
Trust developed a ‘model’ of high quality ECEC.
Staff qualification levels
There is strong research evidence showing the
paramount importance of staff qualifications on the
quality of childcare, which is supported by all
stakeholders. It is clear that the ECEC profession needs
not only to be graduate-led but to include a significant
proportion of graduates working with children. However it
could not be deciphered from the research evidence
exactly what proportion of staff needs to be graduates in
order to ensure high quality.
Two models were put forward to be costed for each age
group:
2+ year olds
Model 1: 50% graduates, 50% Level 3 qualified
0–1 year olds
Model 2: one graduate room leader, remaining staff
have Level 3 qualification
This reflects the substantial evidence showing the
centrality of staff qualifications in supporting quality ECEC
provision, but also the interaction between qualification
and ratios. The greater number of staff required to work
with children under the age of two led to the proposal of
a slightly lower percentage of graduates.
Managers
Given the demonstrated importance of leadership, it is
suggested that all managers should be graduates and
paid accordingly.
Staff pay
The model needs to adjust pay accordingly to reflect the
higher qualifications and to ensure staff can be recruited
and retained.
The Organisation for Economic Co-Operation and
Development has highlighted the low pay levels of
childcare staff across different countries.54
ECEC staff
across the UK are paid at levels much below the national
average and also below other professionals in the
children’s sector. It is also striking that the staff in state-
led settings (mainly full daycare in children’s centres,
nursery schools and primary schools with nursery and
reception classes) earn considerably more than those in
the private, voluntary and independent (PVI) provision.
DCSF’s Childcare and Early Years Providers Survey 200755
showed that staff working in full daycare in children’s
centres – which is usually provided by local authorities –
earned £9.30 per hour compared with £7 per hour in PVI
sessional care and £6.90 in PVI full daycare. Table 1.1
also shows that in the maintained sector qualified early
years (EY) teachers earned £19.60 per hour, nursery
nurses £10.40 per hour, and even ‘other paid early years
support staff’ received £8.70 per hour.
Table 1.1: Average (mean) hourly pay
Full Full in Sessional
daycare children’s care
centres
All Staff
£6.90 £9.30 £7.00
Senior managers £9.80 £14.30 £8.70
Supervisory £7.10 £9.50 £7.10
Other paid staff £5.90 £7.10 £6.10
Nursery Primary schools
schools with nursery and
reception classes
All staff £13.00 £12.70
Heads/EY
co-ordinators £22.10 £17.90
EY teachers (EYTs) £19.60 £17.70
Nursery nurses £10.40 £10.40
Other paid staff £8.70 £8.30
Daycare Trust published a policy paper in 2008
examining the current state of the ECEC workforce and
current Government measures aimed at improving the
quality of ECEC staff.56
The paper argues that the low
pay and working conditions of the ECEC workforce
could jeopardise the universally-held ambitions to
improve the quality of provision and Government
intervention to raise them is crucial.
In costing the model, primary school qualified teachers’
pay is being used to mirror graduate pay, and unqualified
teachers earnings for Level 3 qualified staff: see Chapter 3
for details.
011

Adult-child ratios
It has already been seen that adult-child ratios are a key
factor in ensuring quality, as well as being related to
staff qualifications, training, and group size. The
research – both from this country and others – does not
lend itself to determining ideal ratios.
The current legal ratio for children and staff is laid out in
the Statutory Framework for the EYFS and covers all
ECEC providers. In group settings, for children aged
under two the minimum ratio is 1:3 (ie one staff member
for every three children); and for two-year-olds it is 1:4.
For children aged between three and seven it is 1:8, but
where a member of staff holds Qualified Teacher Status,
Early Years Professional Status or another relevant Level
6 qualification the ratio is 1:13.57
The ratios are a
statutory minimum requirement and some providers do
exceed them.
It was expected that some stakeholders would voice a
desire to increase the current minimum ratios in the high
quality model, particularly given the unease from some
quarters when the ratio was increased to 1:13 for four-
year-olds with Level 6 qualified staff. However this was
not the case. One manager of a small chain of full-time
nurseries did feel strongly that the 1:13 ratio was not
adequate and she was not intending to implement it
when her staff became qualified; furthermore she had
made the decision to reduce to 1:6 the ratio in one of her
settings which served a disadvantaged area, as she has
learnt that those children required more adult interaction
than the children in more affluent areas. This perhaps
confirms the EPPE finding that socially mixed settings
tend to be of higher quality; but it is not a factor that can
be built into the standard model. On the other hand,
stakeholders from nursery schools revealed that their
1:13 ratios did not detract from their quality, a view which
is corroborated by the research evidence. It is therefore
concluded from the available evidence that as long as
staff qualifications and pay are increased, the current
adult-child ratios set out in EYFS welfare requirements are
sufficient to ensure high quality provision.
It is however worth noting the large difference between
two-year-olds with a 1:4 ratio and three-year-olds with a
1:13 ratio; this is possibly too great a reduction in adult
attention on reaching the third birthday. It is suggested
that further work should be done to explore whether
three-year-olds remain at the 1:8 ratio even once staff
are qualified to Level 6.
Premises
From the literature it was not possible to provide any
definitive conclusion on what premises costs would be
in the high quality model. Therefore, Social Market
Foundation were asked to consider two extremes – the
low version with premises costs remaining at current
levels and the other version with premises costs
increasing at the same rate as staff costs.
Conclusion
Stakeholder interviews and roundtable confirmed the
conclusion in earlier literature reviews58
that there is no
agreed understanding or definition of quality in ECEC
provision. Moreover, it is not possible to come to one
given that it is a very subjective issue. It varies with the
subject’s perceived objectives for the provision, the
influence of cultural values, and – where consideration is
being given to future outcomes for children – which
outcomes are being prioritised.
Despite this, it is clear that a distinction can be drawn
between ‘structural’ and ‘process’ aspects of quality:
● Process dimensions are ‘the characteristics of the
child’s experience e.g. interactions with others,
learning experiences, variety in stimulation,
responsiveness in environment’.
● Structural dimensions focus on ‘aspects of the
environment that are fixed, e.g. accommodation,
group size, adult-child ratio, training of staff, health
and safety, stability of staff, management structure’.59
The research evidence shows which of these elements
has a demonstrable effect on the outcomes for children,
and the extent to which they do so. It is clear from this
literature review and confirmed by the project’s
stakeholders that a significant increase in staff
qualifications and pay is required if high quality ECEC
provision is to be achieved in the UK. This is not to say
that a better qualified, rewarded and managed staff in
itself can form a guarantee that every child experiences
high quality ECEC, but it should reduce staff turnover
and will lay the foundations in which the process factors
can flourish. Furthermore, neither current adult-child
ratio nor centre sizes would prevent high quality
provision in these circumstances. Daycare Trust has
therefore costed two models of increased staff
qualifications and pay, one more stretching than the
other and with a range of costings to provide
improvement to premises.

013
Following the establishment of the two variants of the
Daycare Trust high quality model the next stage in the
Quality costs project was to identify the costs
associated with the models, and to determine how they
differ from the current reality.
Working Paper 2: What is the cost of quality? contains
full details of the methodology and costcalculations
undertaken by the Social Market Foundation for this
element of the project. The working paper contains
calculations for five different providers of early
childhood education and care (ECEC): full daycare; full
daycare in children’s centres; sessional care; nursery
schools; and nursery classes in primary schools. In
order to summarise the methodology for this report, the
intermediate tables present only the calculations for full
daycare, but the tables giving the current wages costs
and those showing the final cost figures are given for all
five types of provider.
The high quality model: cost factors
The high quality model includes the following cost factors:
Staff qualifications
The two models outlined in Chapter 2 provide the staff
qualifications required:
For children aged 2 and over:
Model 1: 50% of staff are graduates (Level 6 qualified)
and 50% of staff are Level 3 qualified.
Model 2: 33% of staff are graduates and 67% of staff
are Level 3 qualified.
For children aged under 2:
Model 1: 33% of staff are graduates, 67% are Level 3
qualified.
Model 2: One graduate room leader, with the remaining
staff Level 3 qualified.
Staff-child ratios
The staff-child ratios used in the high quality model reflect
those currently required in the Early Years Foundation
Stage, as they were considered to be appropriate and fit
for purpose. The ratio for under twos is 1:3; decreasing to
1:4 for two-year-olds. For children aged three and over,
the default ratio is 1:8, although if an ECEC setting has a
suitable graduate working directly with the children, it is
permissible to operate with a ratio of 1:13. The latter
reflects the situation in nursery classes, where there is a
ratio requirement of 2:26 (1:13) if one adult is a qualified
teacher and one a qualified nursery assistant.
Staff pay
As outlined in the previous chapter, good pay and
conditions are essential for staff recruitment and
retention, especially if there is an aspiration to see ECEC
staff working at higher qualification levels. Therefore in
the high quality model, ECEC staff pay and conditions
were related to staff in primary schools, with graduates
(Level 6) earning the equivalent of teachers’ pay
(between £20,627 and £30,148). Level 3 qualified staff
would earn the equivalent of unqualified teachers
(between £15,113 and £23,903). For costing purposes
mid-point values were used: £25,388 and £19,508.
Employer’s pension and National Insurance (NI)
contributions were added to staff pay, at 14.1 per cent
and 9.1 per cent respectively. Therefore the hourly wage
(based on 1,265 working hours per year, as in School
Teachers Pay and Conditions) plus employers’ pension
and NI contributions is £24.47 for Level 6 qualified staff,
and £18.74 for those qualified to Level 3.
The senior manager wage is based on desk research
into current levels of pay in full daycare settings and in
schools, and is based on an hourly rate of £27.01 with
employer’s pension and NI contributions added. This
equates to £47,000 based on 252 working days a year,
or £28,000 for 1,265 working hours in order to compare
to the figure for teachers above.
For staff pay in London, a weighting is applied, in line
with the standard weightings to teachers’ pay scales.
Thus, the hourly wage (including pension and NI
contributions) in London is £28.17 (Level 6) or £21.89
(Level 3). The London Senior Manager hourly rate
(including pension and NI contributions) is £31.26.
Other costs
In addition to staff costs, there are other costs to take into
account, such as premises costs, expenditure on
3. What is the cost of quality?

insurance, food, materials, etc. A number of reports – as
well as interviews with providers, local authorities and
roundtable discussions undertaken for this project –
suggest that staff costs currently on average represent 70
to 80 per cent of total costs. This varies considerably from
setting to setting, depending on the region they are in and
whether they have their own specific premises or are, for
example, a sessional setting making use of a church hall
or other community premises. For the cost-calculation,
staff costs are set at 75 per cent of total costs, leaving all
other costs (including premises) at 25 per cent of total
costs. Therefore modelling the current costs, other costs
are assumed to be 33 per cent of staff costs.
A further issue arises when working out the ‘other’ costs
in the high quality model. Premises are a structural
quality factor and in many settings need to be improved;
therefore to allow no increase at all ignores any
improvements to premises and other factors which
require cost. On the other hand, to allow those aspects
to increase at the same rate as staff costs would imply a
potential continuous increase in other costs as the
qualifications of staff improve, and would not be
necessary in many settings; indeed some argue that this
relationship is implausible as a general rule. It is not
justifiable to come up with a figure or a formula for
premises which can represent the cost of a high quality
premises in all parts of the country. Therefore the costing
of the high quality model was carried out in two ways:
1. With the other costs at 33% of the high quality staff
costs.
2. With the other costs at 33% of the current staff costs
– referred to as ‘capped’. The capped option therefore
includes only the increase in staff costs and maintains
a static value for other costs.
The cost of the high quality model is presented as a range,
which allows for differences in premises, in terms of both
variation in costs and their needs for improvement. In
most cases the other costs required for the high quality
model are likely to fall somewhere between these two
levels, allowing for some improvement (and therefore
increased costs) in other costs as well as premises.
Efficiency
It is also important to take staff ‘efficiency’ into account,
ie the amount of time that staff actually spend with
children, rather than time spent on other activities such as
planning, team meetings, consultation with parents,
writing reports, lunch breaks, staff sickness etc. This does
not imply that staff work ‘inefficiently’, merely that they
cannot spend all their time directly with children. In the
cost calculation, after discussion with stakeholders, staff
efficiency is set at 85 per cent for sessional provision,
nursery schools and nursery classes. For full daycare and
full daycare in children’s centres, efficiency levels are set
slightly lower – at 80 per cent – to reflect both that they
do not necessarily have set sessions and that parents are
given more flexibility in the hours they use (so
consequently it is harder to fill every hour of every place).
Costing the high quality model
In order to cost the Daycare Trust quality model, the
2007 DCSF Childcare Providers Survey62
was used to
calculate the number of places per age group in a typical
setting, as the total costs of the setting vary with the
number of children/places in different age groups due to
the different staff-child ratios. For example, the number
of places per age group in a typical (36 place) full daycare
setting are 7 places for under twos, 9 places for two-
year-olds, and 20 places for three- and four-year-olds. 63
Staff costs (including the senior manager) were added
according to the appropriate staff-child ratios. Other
costs – premises and other non-staff costs –- were then
added to the figures, and the adjustment was made for
staff efficiency.
Table 2.1 The total cost of the high quality model in
a 36-place full daycare setting, with staff efficiency
set at 85% and other costs set at 33% of staff costs64
Model 1 Model 2
Model 1 Model 2 capped capped
Under 2s £12.48 £12.72 £10.41 £10.61
2 year olds £10.02 £9.62 £8.37 £8.03
3 years plus with
staff-child ratio 1:8 £5.53 £5.33 £4.62 £4.45
3 years plus with
staff-child ratio 1:13 £3.81 £3.68 £3.18 £3.07
Average cost of
the above, all
age groups
with staff-child
ratio 1:8 £9.34 £9.22 £7.80 £7.70
with staff-child
ratio 1:13 £8.77 £8.67 £7.32 £7.24

015
The cost averaged over each of these age groups is
included because settings often use their charging
structure to cross-subsidise, ie their fees do not reflect
the full extent of the additional costs of caring for babies
and toddlers. This means that the lower cost of caring
for three- and four-year-olds offsets the costs for
younger children, where the ratios and therefore costs
are higher. Working Paper 2 reports these averages for
all types of other settings, but they are not taken into
account in this report as the charging regime should not
mask the real costs to this extent.
As mentioned earlier in this chapter, costs in London
need to be adjusted to take into account the higher
wage and premises costs. Therefore, when calculating
the funding requirements for London in Chapter 6, 20
per cent is added to the costs presented in this chapter.
When calculating the cost of the two high quality models
(ie with different staff qualifications – see above), the
difference between the two versions was found to be
minimal.66
Therefore, rather than cost a range of funding
options (as discussed in Chapter 6) for both models, it
was decided to cost only the funding options for Model
1, which gives the highest quality provision. This allowed
exploration of more iterations of the funding options than
if work had been required on both models.
Comparing the high quality model
with current costs
It is important to compare the high quality model with the
current situation in terms of staff qualifications and wages
(‘current costs’). Table 2.3 below assumes that, in most
instances, staff qualifications meet the requirements in the
model; in reality that is not the case (as explained in
Chapter 2, current levels of staff qualifications are
substantially lower than the model requires, particularly in
the private and voluntary sectors). Indeed, given that
currently only 4 per cent of staff in full daycare, 11 per cent
of staff in full daycare in children’s centres and 4 per cent
of staff in sessional care have graduate staff in place, it
was not considered appropriate to report the figure for the
model with current staff under a 1:13 ratio in Table 2.3 (as
this requires a graduate leader).
The current wage costs of staff in full daycare, full
daycare in children’s centres and sessional care include
NI contributions of 12.8 per cent, but do not include
pension contributions, as most staff in the private,
voluntary and independent (PVI) sectors will not be
receiving employers’ pension contributions.67
Current
wage costs of staff in nursery schools and nursery
classes do include NI contributions of 9.1 per cent and
pension contributions of 14.1 per cent.
Table 2.2: Current wage costs
(with wage costs in the high quality model in italics)
Senior Supervisory Other
manager staff paid staff
Full day £10.56 £7.61 £6.16
care (£27.01) (£24.47) (£18.47)
Full day
care in £15.77 £10.33 £7.59
children’s (£27.01) (£24.47) (£18.47)
centres
Sessional £9.23 £7.30 £6.10
care (£27.01) (£24.47) (£18.47)
EY co-ordinator EY teachers Nursery
/head nurses
Nursery £27.12 £23.86 £12.51
schools (£27.01) (£24.47) (£18.47)
Nurseries £21.77 £21.50 £12.49
class (£27.01) (£24.47) (£18.47)
As can be seen from the table above, when the same
salary is applied across the ECEC sector, this brings
large wage increases for some staff (for example,
supervisory staff in full daycare see their wages increase
by over 200 per cent), but limited increase in other areas
such as for early years teachers. This brings into stark
contrast the different pay levels between different
elements of the ECEC sector. This wage allocation also
highlights that the high quality model is actually
proposing a slightly lower wage for heads of nursery
schools (£27.01 per hour rather than £27.12 per hour, a
0.4 per cent decrease). It may be that the costs for
heads of nursery schools have been undervalued by the
high quality model; if the costs had been set higher, this
would obviously increase the cost of the model.
However, the aim is to ensure parity across the sector
and not to promote different salaries for different types
of provision, although it may be that leaders of larger
centres – which in the DCSF Providers Survey tend to be
children’s centres, nursery schools and nursery classes
in primary schools (50, 60 and 49 places per setting

Table 2.3: Comparison of current costs per child per hour with the costs in the high quality model
(England, excluding London)
Model with High quality model High quality model with cap
current staff on overhead costs
Difference Difference Difference Difference
in £ in % in £ in %
Full daycare
under 2s £4.09 £12.48 £8.39 205 £10.41 £6.32 155
2’s £3.27 £10.02 £6.75 206 £8.37 £5.09 156
3 +(1:8) £1.85 £5.53 £3.69 200 £4.62 £2.77 150
3 + (1:13) n/a £3.81 n/a n/a £3.18 n/a n/a
with cross-subsidy (1:8) £3.07 £9.34 £6.27 204 £7.80 £4.73 154
with cross-subsidy (1:13) n/a £8.77 n/a n/a £7.32 n/a n/a
Full day in children’s centre
under 2s £5.05 £12.10 £7.04 139 £10.37 £5.31 105
2’s £4.11 £9.64 £5.53 135 £8.26 £4.15 101
3 plus (1:8) £2.24 £5.15 £2.91 130 £4.42 £2.17 97
3 plus (1:13) n/a £3.43 n/a n/a £2.94 n/a n/a
Sessional care
under 2s - - n/a n/a n/a n/a
2’s £3.29 £10.40 £7.11 216 £8.68 £5.39 164
3 plus (1:8) £1.97 £6.17 £4.19 212 £5.15 £3.17 161
3 plus (1:13) n/a £4.54 n/a n/a £3.79 n/a n/a
Nursery schools
3 plus (1:8) £4.44 £5.10 £0.66 15 £4.94 £0.50 11
3 plus (1:13) £3.07 £3.48 £0.41 13 £3.36 £0.30 10
Nursery classes
3 plus (1:8) £3.51 £4.46 £0.95 27 £4.23 £0.72 20
3 plus (1:13) £2.23 £2.83 £0.60 27 £2.69 £0.45 20
016
respectively, compared to 36 places in full daycare and
25 in sessional care) – would attract a larger salary.
Furthermore, these high quality wage costs will be an
additional 20 per cent in London, as outlined above, in
the section ‘The high quality model: cost factors’.
Table 2.3 below shows the difference in hourly costs of
ECEC between the current costs and the high quality
model, both in absolute and percentage terms. There
are two sets of high quality costs presented here: one
with other (non-staff) costs increasing in proportion to
staff qualifications and the second in which costs are
capped at current levels.
Again, costs in London will be 20 per cent more: the
London figures are not presented here but reflected in
figures used in the following chapter and in Working
Paper 5.

Conclusion
The cost of Daycare Trust’s high quality model for each
hour for each child was as follows:
As can be seen from the above tables, under the Daycare
Trust high quality model, the cost of ECEC in full daycare
and sessional settings is around 200 per cent higher than
current costs. This huge increase is reduced to (a still very
high) 150 per cent when a cap on other (non-staff) costs
is applied. Full daycare in children’s centres also sees a
sharp increase in costs, but substantially less than those
for full daycare and sessional provision: the increases are
135 per cent, or around 100 per cent when the cap on
overheads is applied.
This increase reflects the fact that, in full daycare and
sessional provision, current costs are very low, so there
needs to be an approximate trebling of costs to reach
the spending required for high quality provision. Even
with a cap on other costs, staff need to be paid at least
double their current average wages in order to achieve
the sort of remuneration needed to attract and retain
personnel with the required qualifications.
Staff qualifications and wages in nursery schools and
nursery classes are already almost at the level described
in the high quality model, so the difference for those
settings is minimal compared to those in other settings:
only around 15 per cent increase in costs for nursery
schools, or 10 per cent if a cap on other costs is
assumed. Cost increases in nursery classes within
primary schools are slightly higher, at 27 per cent and 20
per cent respectively for costs with and without a cap
on overheads respectively.
The table of cost ranges above also indicates that
nursery classes are actually the most cost-effective type
of provision in the high quality model, followed by full
daycare in children’s centres. This is because in nursery
classes the headteacher costs and other costs are
spread over a much larger number of children than, for
example, in nursery schools. Even if the model
understates the costs of a headteacher, nursery classes
are likely to be the most cost-effective, high quality
provision under most plausible cost scenarios.
The model also assumes that different types of settings
have the same premises costs, which is clearly not the
case currently, and therefore any additional expenditure
on premises in nursery schools (which tend to have
dedicated, higher cost buildings) and potentially in other
settings (such as children’s centres) are not captured
here. In addition, costs in full daycare and full daycare in
children’s centres may be higher because of their longer
opening hours and the requirement to provide staffing
even at quiet times (although this is accounted for to
some extent in the staff efficiency calculation).
Sessional providers appear to be the most expensive
under the high quality model; in part this is because of
the limited number of hours that they are open. The
costs for sessional provision are also higher because it
has been modelled on a 25 place basis (the median
number of places from the DCSF Providers Survey),
rather than 36 for full daycare and 50 for full daycare in
children’s centres. Thus, costs which do not vary with
the number of children, such as the senior manager
costs, are higher per child per hour.
In summary the high quality cost model represents only
a relatively small increase (between 10 and 27 per cent)
for maintained settings, but a very significant increase
(up to 200 per cent) for PVI settings. However, the PVI
sector still represents the vast majority of settings with
86 per cent of full daycare places and 93 per cent of
sessional places.68
The following chapters consider how
these additional costs could be paid for.
Table 2.4: Ranges of hourly costs per child in the Daycare Trust high quality model
Full daycare Full daycare in Sessional Nursery schools Nursery classes
children’s centres
Under 2’s £10.41–£12.48 £10.37–£12.10
2 year olds £ 8.37–£10.02 £ 8.26–£ 9.64 £8.68–£10.40
3+ (1:8) £ 4.62–£ 5.53 £ 4.42–£ 5.15 £5.15–£ 6.17 £4.94–£5.10 £4.23–£4.46
3+ (1:13) £ 3.18–£ 3.81 £ 2.94–£ 3.43 £3.79–£ 4.54 £3.36–£3.48 £2.69–£2.83
017

Before going on to consider the impact of the higher
costs of Daycare Trust’s high quality model for early
childhood education and care (ECEC) – especially in the
private, voluntary and independent (PVI) sectors (which
make up 87 per cent of full daycare settings and 93 per
cent of sessional settings69
) – it is important that the
amounts currently paid by both parents and the
Government are established.
Working Paper 3, What do parents pay? compares the
current data on what parents pay and examines what
can be learned about the prices that parents pay and the
fees that providers charge. (These are generally not the
same amounts as most parents receive some kind of
subsidy or help with costs, which will be explored
further below and in Chapter 5.)
Defining and identifying costs for early
childhood education and care
There are a number of surveys that seek to document
the cost of ECEC: both the price that parents pay and
the fees that ECEC providers charge. There are also a
number of difficulties in surveying and comparing these
costs, namely:
● the different definitions of ECEC used in different
surveys;
● the nature of ‘costs’ and the pricing structures across
the sector; and
● the complicated system of financial subsidy that
parents may be eligible for.
We use the following terms to define childcare costs:
Cost is the amount that childcare providers need to
spend in order to provide their service. This will include
staff wages, premises, and other resources, such as
food, activities, insurance.
Spend is the amount spent by parents on childcare.
Fees are the amounts that ECEC providers charge to
parents – this will include any discounts (for example,
for siblings) and could be higher than ‘cost’ if it includes
an element of profit. The amount for fees will not reflect
any subsidies that parents are receiving themselves
through the Working Tax Credit (WTC) or employer-
supported childcare. It could also be lower than ‘cost’
price if supply-side subsidies are obtained from
government, charitable donations or profit from other
services.
With regard to fees, pricing structures vary, as, for
example, many full daycare providers only offer fixed
length sessions whereas others might have more
flexible pricing policies; and sessional care providers
normally offer a fixed-price session, but the length may
vary between 2.5 and 3.5 hours. There may be different
fees depending on the number of hours of childcare
used, siblings involved, time of day, meals included and
parents’ income. Due to child-staff ratio requirements
and statutory restrictions on factors such as floor space,
most settings’ fees are slightly more expensive for
younger children. However, in general the fees structure
does not fully reflect the cost structure, with the result
that there is cross-subsidisation across age ranges to
ease the high cost of ECEC for younger children (under
twos and two-year-olds). Evidence of this is seen in the
cost calculations of both current costs and the high
quality model.
ECEC spend by parents is also difficult to ascertain
because of the complicated system of financial subsidy
that parents may be eligible for, through employer-
supported childcare and the childcare element of WTC.
Some children also receive free places, depending on
their age. It is often difficult for parents to work out and
report what proportion of their childcare fees is covered
by the different subsidies. The Department for Children,
Schools and Families (DSCF) Parents Survey series
comments on the difficulties in surveying parents’
spend on childcare. The researchers found that parents
are confident in discussing the amount they spend on
childcare from their own pockets, but less sure of
subsidies provided by others, for example an employer,
ex-partner or the local authority. Indeed, the 2008 survey
found substantial under-reporting of childcare costs,
where parents did not pay for childcare out of their own
pocket but were unaware of which other
organisations/individuals had contributed to childcare
costs.
018
4. What parents currently pay

Surveys of the cost of early childhood
education and care
The different surveys of the cost of ECEC which have
been explored as part of the Quality costs project are70
:
● Daycare Trust Childcare Cost Survey71
.
● DCSF’s Childcare and Early Years Survey of Parents72
.
● DCSF’s Childcare and Early Years Providers Survey73
:
This report also includes comparisons based on level
of deprivation, with slightly lower costs in more
deprived areas; and by qualification of senior
manager, with settings employing Level 6-qualified
senior managers generally charging more (although
not in children’s centres).
● Department for Work and Pensions (DWP) Families
and Children Study (FACS) FN674
: Analysis of the 2005
FACS data for Daycare Trust/NatCen’s Childcare nation
report shows that on average families spent 11 per
cent of their income on childcare, with lone parents
and families on lower incomes spending a higher
proportion (16 per cent for lone parents and 20 per
cent for families in the lowest income group)75
.
● HMRC Child and Working Tax Credit Statistics:76
Figures from April 2009 indicate that there were
470,000 families benefiting from the childcare element
of WTC, with the average award for help with childcare
costs standing at £68.69. This reflects an average
spend of £94.12 per week that people are claiming for.
(There is no detail on how many hours childcare this
pays for, so it is not possible ascertain an hourly rate.)
● DWP Family Resources Survey.77
● Laing and Buisson’s Children’s Nurseries UK Market
Report.78
Table 4.1: Comparative spend on/fees for ECEC
Please note that due to the differences in methodologies, timescales and reporting of the surveys, the spend and fees in Table 4.1 are not
direct comparisons, therefore please refer to the ‘Notes’ column for a brief explanation of the different amounts.
ECEC spend by parents
Survey Analysis Spend per Notes
hour of ECEC
DCSF Parents Mean hourly spend £2.58 Mean hourly spend. Data from 2007 survey as
Survey 2007 equivalent data not available in 2008 survey. This
includes spend on informal care. England only
DCSF Parents Mean hourly spend, £3.23 As above
Survey 2007 0–2 year olds
DCSF Parents Day nursery fee per £4.22 Mean hourly spend for day nursery per family (so
Survey 2007 hour per family may relate to more than one child)
DCSF Parents Spend per child in £4.66 Mean hourly spend for children aged 0–2 in London
Survey 2007 London aged 0–2 (Standard error of +/- 0.52). These are 2007 survey figures
Family Resources All families who paid £3.30 Sample is working families all with children under 15
Survey 2006/7 for childcare who paid for childcare.
Family Resources Centre-based childcare £3.38 As above
Survey 2006/7
Fees charged by childcare providers
Survey Analysis Hourly fee Notes
Laing and Buisson Full daycare nurseries £3.04 No information on how many hours they classify as whole
only day attendance. Assumed 50 hours a week. Based on
average UK full-time nursery fees in the private sector.
DCSF Providers Mean hourly fee charged £3.20 Survey of 5648 childcare providers
Survey 2007 by full daycare providers
Daycare Trust Average England regional £3.34 Data collected as an average fee from FIS rather than
Childcare Cost from providers directly
Survey 2009
Daycare Trust Cost Average Inner London £4.52 As above
Survey 2009: London cost for nursery for under 2s
019

Conclusion
The different surveys indicate that the average hourly
spend by parents is between £2.58 at the lower end and
£3.30 at the upper end, although the average will be
lower in some regions and higher in others (such as
London). Both of these figures – the former from the
DCSF Parents Survey and the latter from the Family
Resources Survey – include the average costs for both
informal and formal care. The DCSF Parents Survey also
includes nursery and reception classes, which will have a
much lower spend associated with them, if any at all.
Therefore, as this project is only concerned with the cost
of formal care, it can be supposed that the average spend
by parents will be higher than these figures once informal
care and those with little or no cost are excluded.
Looking at fees charged by group providers, the figures
vary between £3.0481
and £3.34, again with higher
amounts in London. It is possible that the average hourly
rates based on childcare fees are more accurate than
those based on what parents say they spend and how
many hours they use, as parents can find it difficult to
understand the cost of their childcare given the various
subsidies that exist. However, these figures do not
represent the actual cost of the provision for different
ages of children, as they include the element of cross-
subsidy discussed above (ie providers undercharging for
babies and overcharging for three- and four-year-olds).
This average hourly fee is similar to the average current
cost of a full daycare setting as identified in the cost
calculation model in Chapter 3. In the cost calculation,
staff wages at current levels – adjusted for staff
efficiency and overhead costs of 33 per cent of staff
costs – would be an average £3.07 across all age groups
(with a ratio of 1:8 for children aged three and above).
However, this average cost again reflects the impact of
cross-subsidy, as the specific fees for different age
groups are substantially higher for the under twos (£4.09
per hour) and substantially lower for those aged three
and over (£1.85 per hour).
The reported fees for ECEC, and even the reported
spend, do not necessarily reflect what parents pay, as
many parents will be able to access free places for their
three- and four-year-olds (and in some cases two-year-
olds), plus financial support with fees through the
childcare element of WTC and employer-supported
childcare (as discussed in Chapter 5).
The impact of the increased cost of the high quality
model on parents will then be discussed in detail in
Chapter 6, as the costings for the high quality model
would almost treble the fees for parents if the full extent
of the increased cost was passed on to them.
International comparisons79
In France, the average charge to parents for
children between 0 and 3 years is about 27% of the
costs; for children aged 3 and above public services
are free. The cost of a crèche is in the region of
€280 (around £25080
) per month.
In Denmark, parents contribute on average 20%
costs by paying fees that are scaled according to
income. There is a maximum limit on individual
parent fees of 25% of costs.
In New Zealand, Kindergarten (sessional ECEC for
children aged 2–5) is mainly government funded and
costs NZ $2–5 per morning or afternoon session.
Daycare centres are open longer, have more flexible
hours and cost around NZ $200 (£88) a week for a
full-time place.
In Sweden, maximum monthly fees for ECEC are
around SEK 1260 (£108) for the first child;
households with a monthly income of over SEK
42,000 pay at most the maximum fee, and other
families on lower incomes pay less. No family pays
more than 3% of gross income and other
households pay a certain percentage of their gross
income. The maximum fees reduce for second and
subsequent children.
020

This chapter explores the current levels of Government
funding of early childhood education and care (ECEC),
both demand-side and supply-side, before going on to
explore the options for funding the higher costs of the
high quality model and the reforms to funding
arrangements that would be needed.
The overall funding levels for ECEC have increased under
the Labour Government since 1997, with initiatives such
as the free entitlement (now available for all three- and
four-year olds), Sure Start Children’s Centres, childcare
element of Working Tax Credit and employer-supported
childcare, all leading to increased spending. The
Government has recognised the importance of early
years in combating disadvantage and improving child
outcomes (particularly for disadvantaged children) and
has therefore begun to invest accordingly.
Free entitlement and the Dedicated
Schools Grant
All three- and four-year olds are currently entitled to 12.5
hours each week of free early learning and childcare, for
38 weeks per year. This is due to be extended to 15
hours per week by 2010, to be delivered more flexibly. A
pathfinder project is also providing ten hours per week
(or in the original pilot areas, 15 hours per week), over 38
weeks of the year, to disadvantaged two-year-olds. The
initial pilot in 63 local authorities has been reported to be
successful82
and therefore is being extended by the
Department for Children, Schools and Families (DCSF) so
that free childcare is now available to the 15 per cent
most disadvantaged two-year-olds across all local
authorities, costing £137 million over two years. Gordon
Brown announced at the 2009 Labour Party conference
that this would be extended to 250,000 two-year-olds by
the end of the next Parliament, and paid for by ending
the tax breaks on employer-supported childcare (see
section on employer-supported childcare below).
DCSF data shows that 92 per cent of three-year-olds and
98 per cent of four-year-olds were benefiting from some
free early education;83
although this may include some
double counting if children access the entitlement
through more than one provider. It does not give data on
whether children are taking up their full entitlement. The
DCSF Childcare and Early Years Survey 2008 indicates
that 78 per cent of eligible three-year-olds received
some hours of free entitlement, and 8 per cent received
early years education but not the free entitlement. Some
parents indicated that this was because their provider
did not offer the free hours, their child was too young, or
they did not know about the free entitlement.84
Twelve
per cent of eligible three-year-olds were not receiving
any early years education. Analysis of the 2004 DCSF
Parents Childcare Survey – undertaken by NatCen for the
Daycare Trust/NatCen publication ‘Childcare Nation’ –
found that children in non-working households, with low
incomes, or in lone parent families, were less likely to
take up the early years entitlement. Fourteen per cent of
those not using the free entitlement said it was because
they couldn’t ‘afford to’, perhaps because providers
were charging some level of fee, or payment for meals
etc, or requiring parents to take longer sessions and pay
for the additional element. The same report found that
28 per cent of families using fewer than 12.5 hours per
week of childcare were paying a fee.85
Funding for the free entitlement is difficult to quantify,
as it is provided through the Dedicated Schools Grant
(DSG) and the early years element is not ring-fenced.
Spending on under fives is generally accepted as being
around £4bn, but this includes spending on reception
classes, and precise figures on free entitlement
spending are unobtainable (either from DCSF or HM
Treasury). Funding is further complicated by the fact that
many children officially in receipt of the free entitlement
are in reception classes at primary school, especially
now that so many schools offer a single point of entry
for four-year-olds in September.
As funding for the free entitlement is provided by DCSF
via the DSG to local authorities, and by local authorities
to schools and settings via locally determined funding
021
5. Current Government spending
on early childhood education
and care

arrangements, there are also variations to the levels of
funding that childcare providers receive. This has
implications for providers in different local authority
areas -– as they might receive different funding levels –
and also for providers in different sectors – as it is
widely accepted that maintained sector provision
receives higher levels of funding than the private,
voluntary and independent (PVI) sectors. For example, in
London in 2007, there was found to be a £112.50 per
child per term differential between the highest and
lowest payments from local authorities to PVI providers.
This amounts to a substantial discrepancy in funding for
a group of children over a term.
A survey of Pre-school Learning Alliance members in
January 2007 indicated that amounts paid for the free
entitlement also varies across the country, with the
highest reported rate for a 2.5 hour session standing at
£8.80 in Wandsworth and the lowest rate of £7.45 in the
Wirral.86
The mean rate paid was £8.08 and the median
£8.10. Information from the National Day Nurseries
Association (NDNA) also indicates variations in funding
levels, with funding for a 2.5 hour session reported as
£8.40 in Yorkshire, £8.22 in Kent and £7.93 in Leeds.87
Table 5.1: Funding levels for the free entitlement for
three- and four-year-olds in the PVI sector
Per session Per hour
Wandsworth £8.80* 3.52
Yorkshire £8.40# 3.36
Kent £8.22# 3.29
Leeds £7.93# 3.17
Wirral £7.45* 2.98
Source: * Pre-school Learning Alliance, # NDNA
There are also substantial differences between the
funding rates for maintained and PVI sector providers.
Section 52 returns88
from local authorities (which provide
data on amounts allocated to providers for the free
entitlement) indicate that nursery schools attract a higher
funding rate than nursery classes in primary schools or PVI
settings.89
The mean rate of funding (per child, per hour) in
maintained nursery schools is £7.13, whereas for nursery
classes and PVI settings it is £4.09 and £3.66
respectively.90
Analysis of the section 52 statements by
Mouchel Consulting found the average figures for nursery
schools to be £6.87 overall (higher in London – at £8.77 for
Outer London and £9.73 for Inner London).91
There is also
a discrepancy in that, while PVI settings have typically
been funded on a headcount or sessional take-up basis,
many school settings have been funded on a per place
basis, regardless of whether all the places were filled.
An estimate for the total predicted spend by local
authorities on the free entitlement in 2007/8 (from the
Section 52 returns), taking the mean total across local
authorities and grossing up to the total number of early
years pupils, was £1.2 billion. This increases to £1.39
billion if local authorities’ central expenditure is taken
into account. Figures of predicted spend for 2008/9
were substantially higher, at £1.5 billion or £1.77 taking
central expenditure into account. These figures are not
reliable for a number of reasons; primarily that there are
some gaps in local authority returns, and the accuracy of
the data is dependent on local authorities filling the
returns in consistently and accurately. For example,
guidance notes for the Section 52 returns indicate that
local authorities record a wide range of early years
central expenditure for PVI settings. There are also large
variations in the spend per pupil in maintained provision,
possibly due to pupils not being recorded as full time
equivalent, or the use of place-led funding deflating
figures. Added to that is the possibility that some local
authorities could include expenditure on early years
provision that is not direct funding for PVI providers for
delivery of the free entitlement.
Funding for the increase in hours -– to 15 hours per
week – and its more flexible delivery has been provided
through the Standards Fund. The funding available
amounts to £590 million over the 2008–11 spending
review period, with £170 million for 2009–10 and £340
million available for 2010–11. There is also additional
funding of £642 million available in the current spending
round for capital spending to support sessional
providers to deliver the provision more flexibly, as well
as to improve quality and ensure that all children are
able to access childcare. These funding streams,
particularly the capital element, do recognise the
increased costs of providing the entitlement more
flexibly, and the ‘pathfinder’ nature of the current
increases in funded provision. It may therefore not be
possible to use these as a reliable baseline to work out
what the full entitlement of 15 hours per week will cost
from 2010. Using the Standards Fund allocation only, the
equivalent cost of 12.5 hours per week of free
entitlement would be £1.7 billion and for the total 15
hours, just over £2 billion.
The free entitlement allocations outlined in Table 5.1

023
above are similar to the current cost calculations from the
DCSF Providers Survey in Chapter 3. In fact the current
costs of full daycare for children aged three and over are
£1.85, or slightly higher at £2.24 for full daycare in
children’s centres. These costs are for the staff-child ratio
of 1:8, as most ECEC providers in the PVI sector are not
yet graduate-led, and so are not able to operate at the
lower ratio of 1:13. However, these base-line costs will
not reflect the actual cost structure, because (as noted
earlier) ECEC providers tend to operate with cross-
subsidies between older and younger children. Looking at
the costs with cross-subsidy in Chapter 3, the equivalent
amounts would be £3.07 in full daycare and £3.80 in full
daycare in children’s centres, which are similar to the free
entitlement funding allocations indicated above.
Single Funding Formula
Largely because of the concerns about variations in
funding and the associated lack of transparency, from
April 2010 local authorities are required to have an Early
Years Single Funding Formula (EYSFF).
As outlined in the DCSF guidance to local authorities, the
EYSFF will consist of one or more basic hourly rates for
providers, based on evidence of providers’ cost
structures.92
In addition, one or more supplements will
be applied, with a required supplement for deprivation,
plus recommended supplements for quality and
flexibility. The guidance states that local authorities ‘must
use the EYSFF to support and promote quality and
encourage a culture of continuous improvement in the
quality of provision’.93
This might be via indicators such
as workforce qualifications, Ofsted inspection ratings,
membership of an approved quality improvement
scheme, or well-developed self evaluation processes.
Sure Start, Early Years and Childcare
Grant
The Sure Start, Early Years and Childcare (SSEYC) Grant
is the other main source of funding to local authorities
(who then distribute to settings) for the different aspects
of support for ECEC. This funding is used to fund local
authority support to settings, as well as direct funding to
settings depending on their circumstances. Funding for
children’s centres has not been included as much of this
funding will not be for ECEC services, but for the wider
services that children’s centres provide. However the
children’s centres budget accounts for an additional £748
million spending. There is also capital investment for
children’s centres (£169 million), but again this will not
necessarily fund ECEC, so has not been included here.
Table 5.2: Funding from the DCSF SSEYC Grant
2009–10
SSEYC Grant
Main grant Sufficiency £126,964,804.00
Outcomes, quality
and inclusion £147,235,934.00
Graduate Leader
Fund £ 75,722,214.00
Black and minority
ethnic take up £ 520,461.00
Buddying £ 4,993,999.00
National Indicator
118 £ 390,993.00
Every Child a Talker £ 16,474,982.00
Access for disabled
children £ 6,476,000.00
2 year old offer £ 58,209,890.00
Capital Childcare capital £214,000,003.00
Total £650,989,280.00
Note: funding streams in italics are not available to all local
authorities
Funding for further education students
The 2007 budget announced the provision of 50,000
free childcare places for workless parents to access
training and learning for work, at a cost of £75 million
over three years (£10m in 2008/09, £25m in 2009/10 and
£40m in 2010/11). The funding is targeted at families
who are unable to draw down other sources of funding,
such as the New Deal for Lone Parents and Working Tax
Credits. Therefore it has been very specifically targeted
at couple-families where one partner is working at least
16 hours per week and the other is not working. The
income threshold was set at £20,000, with the aim of
reaching those families who are experiencing in-work
poverty. However there appear to be a number of
barriers to accessing the Free Childcare for Training and
Learning for Work scheme. The first is the income
threshold of £20,000, which is particularly low for
London families. The criteria for eligible learning or
training may also be affecting take-up; for example
refusals are being made where the training or learning
was not with a Learning and Skills Council provider or
was not considered to offer suitable ‘progression to
work’. It is also arguable that on a more fundamental

level, by excluding lone parents, the scheme is not
targeting those who need help the most. The majority of
enquiries to Daycare Trust’s Information Line about
financial help for student parents are from lone parents
(approximately 75 per cent of calls from students in
further education in July–August 2009) who are
obviously not eligible for the scheme and yet are unable
to find suitable alternative funding. Whilst in theory this
is provided by Jobcentre Plus, feedback from our callers
suggests that this is rarely available.
There are two other funding streams for further
education students who need support with funding their
childcare: Learner Support Funds and Care to Learn.
Learner Support Funds are allocated through the
Learning and Skills Council and in 2009/10 there is
£30,897,000 available for childcare support for students
aged 20 and over. The fund is discretionary and colleges
set their own eligibility criteria. Care to Learn is a more
generous funding allocation for teenage learners,
whereby young parents are entitled to (rather than able
to apply for) childcare support and associated travel, up
to £160 a week (£175 in London).
Childcare element of Working Tax
Credit
The Childcare element of Working Tax Credit (WTC) can
provide families on low to middle incomes with up to 80
per cent of their childcare costs, if a lone parent (or both
parents in a couple) is (or are) in work for at least 16
hours a week. This is up to a maximum level of £175 for
one child and £300 for two or more children, meaning
that parents can claim a maximum of £140 a week for
one child and £240 for two or more children.
The average amount received by claimants had been
declining: from £49.50 per week in 2005/06 to £48.45 in
2006/07. However, since the 2006 increase in subsidy
rate from 70 per cent to 80 per cent, there has been an
increase in the amounts claimed, with the average
(snapshot) figures for December 2008 and April 2009
standing at £68.3794
and £68.69 respectively.95
With the
number of families benefitting in April 2009 standing at
470,400, the amount paid for the childcare element per
week is around £32.3 million, or £1.68 billion per year.
Looking at finalised annual awards (which are more
accurate as they are subject to retrospective
assessment), the annual childcare entitlement for
2007/08 was £1.36 billion.
There are, however, substantial numbers of parents who
work more than 16 hours per week and do not receive
the childcare element.96
According to HMRC tax credit
statistics, 766,400 single parents work more than 16
hours a week and receive more than the family element,
but do not claim the childcare element. For some of
these families it is likely that they will be choosing to
use informal care and so not eligible to claim the
childcare element, but there will be others who choose
not to take up the tax credit or do not know that they are
eligible.
The reasons for the low take up of the credit is due in
part to the tax credit taper, which limits the amount paid
as income levels increase. Therefore, although the
childcare element can pay up to 80 per cent of costs, for
most families the amounts paid will be much lower. For
example a lone parent, with one child and childcare
costs of £156 a week,97
who earns £30,000 per annum
would get approximately 23 per cent of his/her costs
paid. A couple with two children under five who have
childcare costs of £156 a week per child (the average
full-time nursery fees for over twos in England from the
Daycare Trust 2009 survey) and earn a combined total of
£30,000 per annum would get £151.55 from the
childcare element and £96.97 from child tax credit, with
the childcare element covering 49 per cent of their
childcare costs. If household income was £40,000, the
childcare element paid would reduce to £76.24, or 25
per cent of the childcare costs paid.
The restricted and complicated eligibility criteria and
ongoing problems with the administration of the tax
credit further compound the issue. (It seems likely that
at least two-fifths of lone parents receiving tax credits
have been affected by overpayment or underpayment.98
)
Although the issue with overpayments has improved
substantially recently, the press coverage at the height
of the problem seems to have remained in the public
memory, and this deters potential claimants. Parents
tend to have fairly regular changes in circumstances
when it comes to childcare costs, because of changes
to their working hours, school holidays etc. It is very
difficult to work out ‘average’ childcare costs as defined
by HM Revenue & Customs (HMRC) and childcare costs
vary considerably over time (for example during the
summer holidays) which increases the risk of
overpayments or other mistakes.

025
Childcare Affordability Programme
and the Child Poverty Pilots
This is a London-only scheme aiming to make childcare
more affordable for lower income families and to
increase their opportunity of getting in to paid
employment. The Childcare Affordability Programme
(CAP) 05 was launched in 2005 and was originally
intended to end in 2008, but has been extended until
December 2009.99
HMRC and the London Development Agency (LDA) are
currently running a number of tax credit pilots, which
aim to test out ways of simplifying tax credits and
making them meet parents’ needs more effectively.
These pilots build on the work of the LDA’s Childcare
Affordability Programme, which funded an additional
£30 of childcare costs -– up to a total of £205 per week –
to acknowledge the high costs of childcare in the
capital. The extension of CAP05 until December 2009
will fund places up to £215 per week. Under the Child
Poverty Pilots:
1. In the South East region the most vulnerable parents
will be provided with financial support at the time
when childcare costs are incurred – up to 80 per cent
of the total cost, as opposed to an average amount
based on costs over the year.
2. 500 families in five London Boroughs will have access
to intensive guidance to navigate the benefits system.
3. 500 families in five London Boroughs will have 100
per cent of their childcare costs paid through tax
credits – up to £215 per week for one child and £350
for two or more children.
4. For families with disabled children 80 per cent of
childcare costs will be paid through tax credits – up to
a total of £215 for a disabled child and £350 for a
severely disabled child.
Employer-supported childcare
Employer-supported childcare was introduced by the
Government in 2005 to help working parents with the cost
of formal childcare. The majority of employers use a
childcare voucher company to administer the scheme,
although some (mainly smaller employers) pay childcare
providers directly. Each parent can receive up to £243
worth of vouchers each month (or £55 each week) free
from Income Tax and National Insurance Contributions
(NICs). The scheme is primarily administered as a salary
sacrifice, whereby the employee is provided with childcare
vouchers in lieu of a portion of their salary. Although in
theory it can be added on top of salary, in practice the vast
majority of employers provide childcare support through
salary sacrifice (only nine per cent of parents in the 2008
DCSF Parents Childcare survey received contributions on
top of their salary100
). So rather than contributing towards
the costs of childcare, employers are benefiting directly
from the voucher scheme.
In September 2009, Gordon Brown announced in his
speech to the Labour Party conference that he proposed
to extend the free entitlement to 250,000 two-year-olds for
ten hours per week, thereby reaching a third of all two-
year-olds, rather than the current 15 per cent. However, to
pay for this extension, he announced that he would phase
out the tax exemptions on employer-supported childcare,
thus closing the scheme to new entrants from 2011 and
entirely in 2015. The rationale for this policy change is that
the benefits of employer-supported childcare are skewed
towards higher-rate taxpayers. At the time of writing this is
under review.
In December 2008, data collated by HMRC from 12
voucher companies indicated there were 29,864
employers and 298,643 employees in receipt of
childcare vouchers (ie excluding those receiving direct
payments and direct provision).101
Further data from HM Treasury, published as part of the
Pre-Budget Report and Budget reporting, indicates that
the cost of the tax/NICs exemptions associated with
employer-supported childcare was £500 million for
2008/09. This included £130 million as an estimate of
the amounts saved by employers on reduced NICs.
This data on employee use of childcare vouchers and
the amount of tax and NICs revenue forgone is a
substantial increase on earlier years. A study by the
National Centre for Social Research analysed the uptake
and impact of the childcare-related Income Tax and NICs
reforms in late 2005.102
The study reported that 1.4 per
cent of organisations in the sample offered childcare
vouchers, equivalent to approximately 9,600
organisations in the UK. The number of organisations
offering direct payments to childcare providers was
3,600 and those offering direct childcare provision
numbered 4,900. The limited number of organisations
reported to be offering childcare vouchers is explained
in part by a lack of awareness of the existence of the
scheme at the time of the study. In their report,
Kazimirski et al made a cautious estimate of around

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