The Childcare Paradox: Fees Rising But Nurseries Losing £2,565 Per Funded Child

Parents across England are struggling with rising childcare bills but new research by money.co.uk business loans experts reveals the other side of that story: nurseries are losing money on every government-funded hour they provide — and the average provider retains just £78 per child each month after costs.

Did you know?

• The average nursery must fill 31 childcare places (60% of registered capacity) before reaching break-even.

• Providers retain just £933.66 profit per child each year, highlighting the sector’s narrow margins.

• Staffing accounts for around 75% of total expenditure, reflecting strict government-mandated staff-to-child ratios.

• Government funding for three and four-year-olds is £2.25 per hour lower than the average cost of delivering childcare

• This equates to a potential funding gap of up to £2,565 per funded child each year

• The funding shortfall is largest in London, where the gap between funding and average nursery rates exceeds £2

Parents say childcare costs too much. The data shows nurseries are barely breaking even.

Analysis of 2025 Department for Education data reveals that the average private nursery in England makes just £933.66 profit per child each year — around £78 per month — after operating costs. Far from profiteering, many providers are running on the thinnest of margins, needing to fill at least 31 places (60% of their registered capacity) before they cover their costs at all.

The research also found that government funding for three and four-year-olds is £2.25 per hour lower than the average cost of delivering that care. For a child taking their full 30-hour weekly entitlement, that gap adds up to a potential shortfall of £2,565 per funded child each year — a deficit that providers must absorb or offset elsewhere.

Staffing leaves little room for error

The single biggest pressure on nursery finances is staffing, which accounts for around three quarters (74–75%) of total operating costs. That figure is not a choice — it reflects the strict government-mandated staff-to-child ratios providers must maintain by law, regardless of rising employment costs.

Rent or mortgage payments account for a further 9% of operating costs, followed by food (4%), materials (3%), business rates (2%) and energy bills (2%). Together, these fixed and semi-fixed costs leave providers with almost no buffer when occupancy dips or unexpected expenses arise.

The funding gap

On average, nurseries receive £6.42 per hour through the government’s funded hours scheme for three and four-year-olds — £2.25 less than the average cost of delivering that place. The gap is widest in London, where it exceeds £2 per hour, but no region in England is fully covered. Government funding falls below average provider rates for three and four-year-olds in every part of the country.

Morgan Ridley, owner of Morgan’s Childcare based in Sawbridgeworth, Hertfordshire, said:

“There are so many costs involved in being a childminder that people don’t always see. Everyday essentials like nappies, wipes and food all add up, and with rising prices there’s very little room for unexpected expenses.

“My priority has always been to provide a safe, nurturing, high-quality environment for the children in my care while keeping my services as affordable as possible for families. Like many childminders, I’m always looking for ways to work more efficiently without ever compromising on the quality of care.

“Occupancy is one of the biggest factors in keeping my business sustainable. It’s not about maximising profits — it’s about making sure I can cover my mortgage, bills and other running costs so I can continue supporting local families for years to come.

“I also wish more parents understood how childcare funding works. The funding rates vary depending on a child’s age, and for three-year-olds the amount I receive is actually lower than my usual fee, meaning I lose money on funded places.

“Any surplus I do make is reinvested back into my setting. Whether it’s introducing new experiences like Hartbeeps sessions, buying new toys and learning resources, or improving the environment for the children, I’m always investing back into the quality of care because giving children the best possible experiences is what matters most.”

Matt Browning, money.co.uk business loans expert, said:

“Nurseries play a vital role in supporting families and enabling parents to work, but they are also businesses facing many of the same financial pressures as companies across the wider economy.

“Our analysis shows that providers need to maintain high occupancy levels simply to cover their day-to-day operating costs. As staffing accounts for around three quarters of expenditure, and government funding often falls short of the true cost of delivering childcare, there is very little room for unexpected costs or periods of lower occupancy.

“Many providers face a difficult balancing act — investing in facilities, maintaining quality, and managing rising costs while ensuring childcare remains affordable. Access to flexible finance such as a business loan can help businesses spread the cost of improvements, purchase equipment or create additional childcare places without placing unnecessary strain on cash flow.”

Five ways childcare providers can reduce costs without compromising quality

Matt provides his top tips below:

1. Invest in energy efficiency Replacing lighting with LEDs, improving insulation or installing solar panels (where appropriate) can reduce long-term energy bills while making settings more environmentally sustainable.

2. Review food procurement Buying seasonal produce, reducing food waste and planning nutritious vegetarian meals a few times a week can help manage catering costs without compromising children’s nutrition.

3. Maximise occupancy Even small improvements in occupancy can have a significant impact on financial sustainability. Building relationships with local employers and schools can help maintain consistent demand throughout the year.

4. Invest in equipment that lasts Higher-quality furniture, outdoor play equipment and learning resources often cost more upfront but typically require replacing less frequently, reducing costs over time.

5. Plan capital investment carefully Whether upgrading outdoor spaces, improving accessibility or investing in energy-saving measures, spreading the cost through business finance such as business credit cards or business loans can help providers make improvements while protecting day-to-day cash flow.

Notes:

The analysis models the finances of a typical private group-based nursery in England using 2025 Department for Education survey data alongside industry benchmark data on occupancy, operating costs, childcare fees and government funding rates. Based on a typical private group-based nursery with 51 occupied places and average annual operating costs of £872,100.

Key findings:

• The average nursery must fill 31 childcare places (60% of registered capacity) before covering its operating costs.

• The average nursery makes £933.66 profit per child each year.

• Staff costs account for around 75% of total expenditure.

• Government funding for three and four-year-olds is £2.25 per hour lower than the average cost of delivering childcare.

• This equates to a potential funding gap of up to £2,565 per funded child each year.