Under the current system two-years-olds living in families in receipt of benefits such as income support, jobseeker's allowance and working tax credit are eligible for 15 hours a week, or 570 hours a year, of free early years education.
But with these benefits being replaced by universal credit the government is looking to alter the eligibility criteria so that children will receive the free entitlement if their families receive universal credit and earn less than £15,400 a year before benefits are taken into account.
Under the plans the government estimates the number of two-year-olds eligible for free childcare will rise from 160,000 as of January 2017 to 168,000 by the time universal credit is rolled out.
The changes are due to take effect from 1 April 2018 and will operate alongside the existing eligibility system until universal credit is fully introduced.
The government has said that current non-economic criteria - which makes groups such as children in care, those who have been adopted, and children with special educational needs eligible - will not be affected by the proposed changes.
Launching a six-week public consultation on the plans, children's minister Robert Goodwill said: "Our proposals not only ensure that no two-year-old who is already benefitting from the free 15 hour offer loses it, but will give thousands more the chance to benefit, supporting their early development.
"This is an important issue and it is important that we get this right. We want to hear from families, early years' professionals and other experts throughout this consultation so we can identify those children who need our support most."
The Pre-school Learning Alliance said it welcomed the principle of giving more families access to 15 hours of free childcare.
However, it fears families could struggle to access the entitlement because providers are cutting places for two-year-olds and instead prioritising the provision of the free 30-hour entitlement for three- and four-year-olds, which came into effect in September.
"If the government is going to offer additional two-year-old places, it needs to make sure that those places will actually be available," said Pre-school Learning Alliance chief executive Neil Leitch.
"With the introduction of the 30-hours scheme, there is a real danger that childcare providers struggling to balance the books will opt to reduce the number of two-year-old funded places in order to deliver the extended three- and four-year-old offer.
"Indeed, a recent alliance survey found that more than four in 10 providers who planned to deliver the 30 hours were likely to have to reduce the number of places offered to children of other ages as a result of the policy.
"As such, and especially with this change set to be introduced in the busy summer term, it is vital that the government funds both schemes adequately to ensure that early years providers have sufficient capacity, staff and resources to deliver places to the growing number of children who need them."
The government is also looking to change the eligibility criteria for free school meals for children due to the rollout of Universal Credit.
An eight-week public consultation launched last month proposes making free school meals available to children living in households with an income of less than £7,400 before benefits, which could mean 50,000 more children becoming eligible.