The NatCen Social Research report on funded early education entitlements found that in 2018 just 72 per cent of eligible disadvantaged two-year-olds are taking up their 15 hours funded childcare entitlement. In comparison, take-up of 30 hours funded childcare for three- and four-year-olds is 94 per cent.
The report, which is based on analysis of government data and interviews with council early years leads, childcare providers and parents, found that a key factor in the low take-up rate for disadvantaged two-year-olds is a reluctance by providers to offer places due to the higher staffing ratios involved.
In addition, providers told researchers that this group of younger children, who include those in care as well as those from low-income families, have higher, costlier, needs to cater for.
"The challenge of providing sufficient free early years entitlement for two-year-olds was a common theme," states the report.
"Across the board, there was evidence from providers that two-year-old places were less financially lucrative due to the higher staffing ratios, the need for more space and the higher needs of the children eligible for the entitlement and their families."
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The report also found a slight decline in take-up of three- and four-year-old places across England and sharper falls recorded in London.
Inner London boroughs have the lowest three- and four-year-old free entitlement take-up rate in England, of 80 per cent, rising to 87 per cent in outer boroughs.
"The overall take-up figure of 94 per cent for three- and four-year-olds masks considerable variation across regions and local authorities," states the report.
Take-up of funded places among disadvantaged two-year-olds is also far lower in the capital, at 60 per cent in inner London and 63 per cent in outer London, the report found.
Among recommendations made to improve take-up is better local marketing of funded entitlements, including direct contact with parents. The application process also needs to be simplified.
"Evidence from the qualitative interviews indicates that local authorities typically used a combination of actions to improve take-up," states the report.
"The ability to implement these was underpinned by three factors: the capacity, resources and budget within early years teams; the quality and nature of partnerships and relationships across local services; and the extent of senior support within a local authority for the drive to increase take-up."
National Day Nurseries Association head of policy and external relations Jonathan Broadbery said funding shortfalls to providers is a key barrier that needs to be addressed.
"Research with our members shows that more than half make a loss on funded places for two-year-olds and this jumps to almost 90 per cent for the three- and four-year-olds. Sadly, this means nurseries are limiting these places because many just cannot afford to offer them at such a loss.
"Many nurseries and other childcare providers will object to this report stating that providing two-year-old places is ‘less financially lucrative' for them, when in reality, funding shortfalls mean that many are struggling to remain viable."