Self-employed childcare providers receiving 'free entitlement' funding risk losing Universal Credit payments, Alliance warns

Early years providers registered as self-employed or sole traders who receive Universal Credit could miss out on payments as a result of receiving ‘free entitlement’ funding, the Early Years Alliance (formerly the Pre-school Learning Alliance) has warned.

Under current rules, the Department for Work and Pensions (DWP) does not make a distinction between income from parent fees, spread across the year, and larger funding payments, which may be made on a termly basis, when assessing eligibility for Universal Credit payments.

This means that if a childcare provider registered as a sole trader or self-employed receives a funding payment pushes their total ‘income’ for a certain month over the minimum threshold, their Universal Credit payments may be reduced, if not stopped altogether – even though this funding would need to be spent on the provision of childcare by their setting for the entire duration of the term.

The DWP confirmed to the Alliance that early years funding is “regarded as part of the business’ income and therefore treated exactly the same as the fees paid by parents (any customers / service users) to the childcare provider (business)”.

It added that while “monthly assessment is aligned to the way the majority of employees are paid”, earning income in different patterns – so that providers effectively “receive two or more sets of earnings during one Universal Credit assessment period” – could indeed “reduce, or in some cases completely reduce the Universal Credit award the claimant receives that month”.

This issue was first raised to the Alliance by William Towgood, the owner of Bishopstoke Pre-school in Eastleigh, Hampshire, last year. However, it took the DWP several months to provide a full response to the Alliance’s queries.

William receives government funding three times a year – however, when previously registered as a sole trader, in each month he received a ‘free entitlement’ payment, he would lose Universal Credit for that month. He has now registered his pre-school as a limited company, meaning that he is now treated as an employee, and so funding income is treated as separate business income.

The DWP has not indicated that it has any plans to review the way the Universal Credit applies to self-employed providers who receive government funding.

 Commenting, Neil Leitch, chief executive of the Early Years Alliance, said:

“This is a truly ridiculous situation: the government is well aware that termly funding has to pay for the provision of care and education across the whole term. Why on earth, then, is the DWP treating such payments as if they are personal income that might be spent in full within the month?

“At a time when so many providers are struggling to stay afloat as a result of government underfunding, the prospect of some being financially disadvantaged even further as the result of the DWP’s inflexible approach to Universal Credit payments is incredibly concerning.

“The fact that it is the combination of two government policies that is causing this issue just adds insult to injury. It’s vital that the DWP and DfE work together to review this situation as a matter of urgency and ensure that no provider is left out of pocket as a result of these two schemes.”

William Towgood, the owner of Bishopstoke Pre-school in Eastleigh, Hampshire said: 

“Small settings where owners are in receipt of Universal Credit can see their payments stopped when the government funding is paid into their business account.

 “Universal Credit adds to the stress to sole traders in the early years, on top of frozen funding, pension contributions, minimum wage and rising costs.”




  • The Early Years Alliance (formerly the Pre-school Learning Alliance) is the largest and most representative early years membership organisation in England. A registered educational charity, it also provides high-quality affordable childcare and education to support children and families in areas of deprivation throughout the country. 
  • The Alliance represents 14,000 member settings and supports them to deliver care and learning to more than 800,000 families every year. We deliver family learning projects, offer information and advice, produce specialist publications, run acclaimed training programmes and campaign to influence early years policy and practice.
  • The Alliance website is