A nursery’s income comes from two payers at once: parents and the local authority. Since the expansion of government-funded childcare, more children attend on funded entitlements, paid at a rate set by each local authority, while parents pay for extra hours, meals and consumables. Costs are dominated by staff, whose numbers are fixed by ratios.
Income streams
| Income | Payer | How it is paid |
|---|---|---|
| Funded entitlement hours | local authority | termly or monthly, often with an estimate followed by an adjustment once headcounts are confirmed |
| Additional hours | parents | monthly in advance, usually by direct debit or tax-free childcare account |
| Meals, consumables and trips | parents | optional charges, invoiced separately |
| Registration fees and deposits | parents | deposits are refundable or credited to the final invoice |
Keep the funding as its own income account and reconcile every local authority remittance to the headcount return that generated it. Adjustments after the census date are common; post them as they are agreed rather than waiting for the year end.
VAT: exempt, with consequences
Childcare provided by registered providers is exempt from VAT. Most nurseries are not VAT registered at all. Those that are, because they also make taxable supplies such as meals sold separately to non-attendees or room hire, face partial exemption: VAT on costs used for childcare cannot be recovered. Check the treatment of each extra charge: some are closely linked to the childcare and share its exemption.
Billing parents correctly
Funded hours must be free at the point of use. Additional charges have to be optional and clearly separated on the invoice. That makes invoice design an accounting issue as well as a compliance one: separate lines for additional hours, meals and consumables, and a clear note of the funded hours included.
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Staff costs and ratios
Staff are typically 70% or more of costs. Ratios by age group decide how many staff each room needs, so a useful monthly report is staff cost per child per room. Track:
- contracted and bank staff, with holiday pay accrued for irregular-hours bank staff;
- apprentices, who may have their training funded through the apprenticeship system;
- qualification-related pay supplements;
- pension auto-enrolment for all eligible staff.
A worked funding reconciliation
For the spring term, the local authority pays on an estimate of 4,200 funded hours. The confirmed headcount shows 4,350 hours.
| Hours | Amount | |
|---|---|---|
| Paid on estimate | 4,200 | received |
| Confirmed | 4,350 | due |
| Adjustment receivable | 150 | at the authority’s hourly rate |
Book the adjustment as income receivable when the headcount is confirmed, and clear it when the authority pays.
Charitable and not-for-profit settings
Many pre-schools are charities or community interest companies. Charities prepare accounts under the Charities SORP, restricted grants must be tracked separately, and Gift Aid may apply to genuine donations but not to fees.
Month-end routine
- Invoice parents for the coming month and collect via direct debit or tax-free childcare.
- Reconcile funding remittances to headcount returns.
- Review staff cost per room against occupancy.
- Chase overdue parent balances early; childcare debts escalate quickly.
For childminders working on their own, see childminder accounting; for the exemption mechanics, VAT partial exemption.
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