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

Introduction

1. The payment of sustainable rates to funded providers in the private, third and childminding sectors is vital to supporting financial sustainability, and is a key aspect of Funding Follows the Child.

2. This updated guidance, which replaces previous versions of the sustainable rates guidance, sets out the process for local authorities to set sustainable rates for 2025-26.

3. This includes the approach for local authorities to distribute the additional £9.7 million funding that the Scottish Government will provide in 2025-26 to enable

childcare workers delivering funded early learning and childcare (ELC) in private and third sector services to be paid at least the new real Living Wage rate of £12.60 per hour from April 2025. The commitment will also be applied in a fair and sustainable way for all childminders who deliver funded ELC.

4. The guidance has also been updated to reflect the recommendations of the joint Scottish Government and COSLA Sustainable Rates Review (the “Review”) in particular to introduce greater standardisation in the rates setting process. Full implementation of these changes are dependent on the outputs of the new cost collection exercise which will be undertaken in Spring 2025. Local authorities are expected to make progress towards reflecting these changes during 2025-26, ahead of fully embedding within the rate setting process from 2026-27 onwards.

Background

5. The Scottish Government and COSLA have issued joint guidance for local authorities to support them to set sustainable rates for private, third sector and childminding providers to deliver funded ELC. Three iterations of this guidance have been published to date:

• April 2019 – original guidance to support local authorities to set sustainable rates from August 2020.
• May 2022 – interim guidance, to complement the original 2019 guidance, for local authorities to set rates in recognition of the challenges of ensuring a sustainable rate given the impacts of the COVID-19 pandemic and the costs crisis.
• March 2024 – interim guidance, to complement the original 2019 guidance, to set out how the commitment for childcare workers delivering funded ELC in private and third sector services to be paid at least £12 per hour from April 2024 would be delivered through the sustainable rates setting process in 2024-25.

6. In December 2023 the Scottish Government and COSLA published the Sustainable Rates Review. The Review set out a wide ranging programme of reform to strengthen the process for setting sustainable rates.

7. This included updating the sustainable rates guidance, in particular to move towards greater standardisation; and working with local government and funded providers to consider options for obtaining more robust and reliable cost data to ensure a full understanding of the costs of providing funded ELC in different settings.

8. A key principle of the sustainable rates setting process is that it should be evidence-based, taking account of the cost of providing ELC in a local area based on parameters which are clear and transparent. To support this, and deliver the recommendation from the Sustainable Rates Review, a new national cost collection exercise will be undertaken in Spring 2025. This will ensure that our long-term investment to support the setting of sustainable rates is informed by a robust and reliable evidence base.

9. In 2025-26, the Scottish Government will provide £9.7 million additional funding to local authorities to enable childcare workers delivering funded ELC in private and third sector services to be paid at least the real Living Wage (of £12.60 per hour) from April 2025. The commitment will also be applied in a fair and sustainable way for all childminders who deliver funded ELC.

10. This follows the additional £16 million of recurring investment from the Scottish Government in 2024-25 to support payment of the previous real Living Wage increase from April 2024. This additional funding was delivered to providers through a consistent and transparent approach as part of the 2024-25 sustainable rates setting process.

11. The Scottish Government and COSLA acknowledge that this guidance is being published whilst local authorities and providers continue to face cost and workforce pressures. These include the challenge of managing the additional costs associated with the changes in Employer National Insurance Contributions, announced by the UK Government, which will take effect from April 2025.

Sustainable rates setting for 2025-26

12. This guidance sets out the process for local authorities to set sustainable rates for private, third sector and childminding providers delivering funded ELC in 2025-26. It replaces previous versions of the sustainable rates guidance.

13. It is designed to support delivery of the additional £9.7 million funding to funded providers for the real Living Wage uplift from April 2025 as part of the annual sustainable rate setting process and in line with the approach agreed by the Scottish Government and COSLA for 2025-26.

14. Section 2 (The National Standard for all Early Learning and Childcare Providers) of the Funding Follows the Child Operating Guidance sets out how settings can meet the Fair Work criterion in the National Standard and the ELC real Living Wage commitment. The real Living Wage commitment requirements are also included in Annex A of this guidance.

15. The guidance also reflects the recommendations of the Sustainable Rates Review and provides the framework for a more standardised rates setting process. Local authorities are expected to make progress towards implementing these changes during 2025-26. The changes will be fully reflected by local authorities as part of the rates setting process from 2026-27 onwards, when they will have the data from the new cost collection exercise.

16. New sustainable rates guidance will be published in early 2026 to reflect arrangements for 2026-27, informed by the findings of the cost collection exercise.