Funded early learning and childcare 2025-2026: guidance for setting sustainable rates

Annex B: Methodology for estimating the minimum uplift to sustainable rates to reflect costs of the new real Living Wage rate from April 2025

Overview

1. All funded providers in the private and third sector will receive additional funding to increase staff pay to at least the new real Living Wage rate of £12.60 per hour from April 2025 via minimum uplifts that are applied to their current (2024-25) sustainable rate(s). The commitment will also be applied in a fair and sustainable way for childminders who deliver funded ELC.

2. The size of this uplift has been calculated to reflect the estimated average increase in the staff cost element of the sustainable rate required to meet the increase in the real Living Wage from £12 per hour to £12.60 per hour.

3. Sustainable rates (for 2024-25) should have been set, in line with the 2024-25 Sustainable Rates Guidance, at a level to allow funded providers in the private and third sector to pay at least the real Living Wage of £12 per hour to staff delivering funded ELC.

4. Moving to £12.60 per hour from April 2025 represents a 5% increase in the staff costs associated with those workers who were receiving the previous real Living Wage rate of £12 per hour. Local authorities will apply at least a 3.75% increase to their 2024-25 sustainable rates in 2025-26 in order to fund this increased pressure on the average staffing costs element of sustainable rates

5. It is important to note that staff within these services will likely be on a range of salaries, with some above or below the real Living Wage rate of £12 per hour in 2024-25. The minimum uplift approach therefore uplifts the total staff cost element (not just the element of staffing costs covering those on the real Living Wage) of the average sustainable rate by 5%.

6. Applying the uplift to the overall staff cost element is expected to provide scope to funded providers to maintain existing pay differentials within their settings.

7. Going forward there is a need for more robust and reliable evidence on the costs of delivering funded ELC in private, third and childminding sector providers. This includes a need for more robust information on the total staffing costs that providers face, including ‘on costs’ such as employer National Insurance Contributions and pension costs. It will also be important to capture more information on wage differentials across staff within settings.

8. To enable this, and to deliver a key action in the Scottish Government and COSLA Sustainable Rates Review, a new national cost collection exercise will be undertaken in Spring 2025. The Diffley Partnership have been successful in securing the contract for this work. The outputs from this exercise will support sustainable rate setting from 2026-27.

Estimates for 2025-26

9. Evidence from the most recent national cost collection exercise, undertaken by Ipsos Mori in spring 2022, indicates that total staff costs accounted for between 70% and 80% of total costs for providers in the private and third sector who deliver funded ELC.

10. For the purposes of estimating the size of the minimum uplift it is assumed that staffing costs represent between 70% and 80% of the sustainable rate that these funded providers receive.

11. As with the approach for 2024-25 we have applied an assumption that staff costs account for, on average, 75% of total costs.

12. Uprating the total staff cost element (75%) of the sustainable rates by 5% results in an increase in the overall rate of 3.75%.

13. In order to support payment of the increased real Living Wage all funded providers in the private, and third sector will therefore receive a minimum uplift of 3.75% to the sustainable rate(s) they received in 2024-25.

14. As set out in the guidance, the commitment will also be applied in a fair and sustainable way for childminders, with the minimum 3.75% uplift to 2024-25 rates also being applied to the sustainable rates paid to all childminders delivering funded ELC in 2025-26.

15. Evidence on the costs of delivery for childminders is limited, with previous cost collection exercises not collecting information on childminders to the same extent as for private and third sector funded providers. More robust and reliable data on the costs of delivery for childminders will also be collected as part of the new national cost collection exercise that will be undertaken in Spring 2025.

16. Local authorities are responsible for determining the overall sustainable rate for 2025-26 in line with this guidance. The overall sustainable rate(s) for 2025-26 should, in addition to the minimum 3.75% uplift to enable payment of at least the new real Living Wage, be set in line with this guidance. These other, non-staffing cost elements, are assumed to account for, on average, 25% of the sustainable rate.