Higher qualifications put pressure on salaries but pay rates still below average

However, while salaries in the sector are low, parents in England pay more than their European counterparts, despite the Government spending more than other countries on investing in childcare.

The Childcare Provider Finances survey analyses the overheads providers face, such as staffing costs, and whether settings made a profit.

For nurseries and pre-schools staffing is the main overhead, accounting for 77 per cent of total costs. There is increasing pressure on staff costs, as qualification levels rise, but pay in the sector remains well below the national average. The average income for a childminder before costs was £12,200 and after costs was £7,600.

Larger nurseries were more likely to make a profit (66 per cent) than smaller settings (56 per cent). The report said that 'for-profit' settings made an average of £13,600.

But the survey revealed that some owners might also draw a salary that is excluded from profitability figures. However, when data for salary and income were combined, the report said that 'at best' owners of 'for-profit' settings were earning around £27,000, in line with UK median earnings.

Many providers had frozen fees for parents over the past two years (from January 2010). This was more likely to be the case for childminders (60 per cent), but a third of settings had also not increased their fees since that time.

However, out-of-school clubs had put their fees up by an average of 10 per cent.

The key area requiring investment among group-based providers was outdoor spaces or playgrounds. Computer equipment, repairs or decorating buildings, staff training and the need for more staff were other areas that were highlighted.

Among childminders, the key areas were training, outdoor spaces or playground and computer equipment.

One in ten providers said they had not invested enough in their provision in the past two years and that they would invest even less in the next two. These tended to be smaller settings with low occupancy rates.

A quarter of group-based providers cited insufficient demand for places as their biggest financial worry, followed by the cost of employing staff and parents being able to afford fees.

For childminders, a lack of demand for places and parents being able to afford fees were the most pressing concerns.

The report highlighted that concerns about insufficient demand for places might 'naturally decrease in the future due to the twin impact of demographic shifts' (there will be an extra 458,000 children from birth to ten between now and 2020), and the expansion of places for two-year-olds.

However, the report warned that this could lead to an increase in fees. 'As providers start to reach capacity there will potentially be less competition between settings to enrol children on their books, which may (in tandem with rising staff costs) serve to exert upwards pressure on fees in some settings.'

Ryan Shorthouse, a researcher at the Social Market Foundation (SMF), said that compared with other OECD countries, the financial contribution of both Government and parents was high, suggesting that the cost of delivering childcare was greater.

He said, 'The main cost for nurseries is staff wages. So the understandable demands for higher quality staff have been partially responsible for the consistent rise in prices over the past decade. But it is the case that the staff-child ratios in this country are much more stringent than elsewhere.'

Shorthouse added, 'The SMF first suggested that it may be worth relaxing these ratios as the number of better-qualified staff increases in order to reduce labour costs without undermining quality, and it is welcome that the Department for Education is now recommending further exploration of this.'