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

Section 5: Approach to setting sustainable rates for 2025-26

57. There are two elements to the sustainable rate setting process in 2025-26 that local authorities are expected to reflect:

• Staffing costs - required minimum uplifts to all sustainable rates to reflect the estimated average increase in staffing costs required to enable delivery of the new real Living Wage rate of £12.60 per hour from April 2025 (staffing costs are assumed to account for, on average, 75% of the sustainable rate); and
• Non-staffing costs - the remainder of the sustainable rate for 2025-26 is set in line with this guidance, and should reflect the characteristics of a sustainable rate as set out in Section 1 (non-staffing costs are assumed to account for, on average, 25% of the sustainable rate).

58. The process for setting sustainable rates in 2025-26 is summarised in Box 1 with further details set out in the sections below.

Box 1: Key steps for setting sustainable rates for 2025-26

• Apply a minimum 3.75% uplift to all 2024-25 rates to reflect the estimated increase in the average staff cost element of the sustainable rate required to meet the real Living Wage uplift from April 2025. This reflects staffing costs accounting for, on average, 75% of sustainable rates.
• Apply the minimum 3.75% uplift to the sustainable rate paid to all childminders delivering funded ELC.
• Set the remainder of the sustainable rate in-line with this guidance (non-staffing costs are estimated to account for, on average, 25% of the sustainable rate). The overall rate must be affordable for local authorities in terms of the budgets available.
• If sustainable rates for 2025-26 are set after April 2025, backdate any payments that reflect the increased real Living Wage to 1 April 2025.
• Confirm the funding to be provided, in addition to the sustainable rate, to support delivery of the free meal commitment.
• Include a transparent breakdown as to each element of the increase, including the uplift for staffing costs, in sustainable rates communications to funded providers.

Delivering the real Living Wage uplift in 2025-26

59. An additional £9.7 million of in year funding will be made available in 2025-26. This is to enable local authorities to increase the sustainable rates paid to funded providers in the private and third sector to meet the estimated costs of the real Living Wage uplift to £12.60 per hour from April 2025.

60. 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. More detail on the methodology used to calculate the required minimum uplift is at Annex B.

61. 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 all sustainable rates paid to childminders delivering funded ELC in 2025-26.

62. Local authorities are expected to be transparent as to how this increased funding to reflect the new real Living Wage is included in their sustainable rate(s) for 2025-26.

63. As part of the move towards more standardisation in rates setting and to support financial planning by funded providers, more local authorities are setting rates earlier in the financial year. Where sustainable rates for 2025-26 are confirmed after April 2025 local authorities should ensure that any payments to funded providers to support delivery of the uplifted real Living Wage rate are backdated to 1 April 2025.

Key considerations in setting overall sustainable rates for 2025-26

64. The minimum uplift only reflects the estimated increase in the average staffing cost element of the sustainable rate required to meet the real Living Wage uplift from April 2025.

65. In addition to the minimum uplifts to cover the estimated additional staffing costs, the final sustainable rate(s) for 2025-26 should also reflect other, non-staffing, cost elements and the requirements for the sustainable rate set out in this guidance. This includes providing scope for reinvestment (reflecting a measure of profit in a private sector setting or surplus in a third sector organisation).

66. The overall rates set must also be affordable for local authorities in terms of the budgets available.