In a survey of providers, 95 per cent said government funding for three- and four-year-olds did not cover costs.
More than 79 per cent also said the rate of funding for two-year-olds was not enough.
Most respondents in the poll by the National Day Nurseries Association (NDNA) – 85 per cent – said they expected to either break even or make a loss this year.
The NDNA said their survey showed “underfunding is a growing issue” in the sector, which is facing uncertainty around reduced income, increasing operating costs and the impact of the Covid-19 pandemic.
“This is pushing more early years providers into the unsustainable position of operating at a loss,” the charity said in their new report.
Purnima Tanuku OBE from the NDNA said the results were the “most shocking” the charity has seen over a decade of member surveys.
“Throughout the pandemic, we have highlighted challenges facing nurseries with increased costs and reduced incomes,” the charity’s chief executive said. “But underfunding is a long running issue that must be tackled.”
All three- to four-year-olds in England are eligible for 570 free hours of childcare a year, which is often taken as 15 hours a week across 38 weeks.
Working families are able to get up to 30 hours a week.
For disadvantaged families with a two-year-old child, the government offers 15 hours of funded childcare a week.
The government funds 55 per cent of early education and childcare hours across England, according to the NDNA poll.
In areas of deprivation, government funding rose to 72 per cent of hours.
“The government is the largest purchaser of early education and childcare from providers, and this share is growing according to this survey,” the NDNA said in the report called Stop Underfunding – Start Building Futures.
“Any underfunding of these places will have a greater impact on the sustainability of nurseries and the viability of children’s places.”
A Department for Education spokesperson said: “We recognise that the pandemic has created challenges for early years providers, which is why we provided significant financial and business support throughout to protect them.”
They added: “We have invested more than £3.5bn in childcare in each of the last three years, and we’re making millions more available through our early years recovery work to level up children’s outcomes.”
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