Parents in England will be forced to pay higher fees for childcare this year because of a lack of government funding, new research suggests. Nurseries and childminders are being driven out of business, while staff feel stressed, demoralised and even suicidal.

The Early Years Alliance (EYA), a membership organisation representing nurseries and childminders, has accused the government of turning a blind eye to the financial chaos hitting a sector dominated by low-paid female workers, which will be made worse when the national minimum wage increases by 5% on Sunday.

The government has frozen the rates it pays childcare providers in England to offer qualifying parents agreed hours of “free” government-funded care until 2020, leaving nurseries and childminders to shoulder the burden of higher wage bills while subjecting them to a real-terms funding cut.

A survey of EYA members, seen by the Observer, suggests two-fifths are likely to reduce staff over the next year as a result of this under-funding. Nearly half of providers fear they will go out of business in the next 12 months and 81% say they are so stressed about financial viability it is affecting their mental health. Six respondents said they had thoughts of ending their own life.

There is not enough funding in the system and the government just turns a blind eye to it Neil Leitch, EYA chief

Many providers now plan to cut corners, while charging more. Of the 1,615 nurseries, pre-schools, childminders and out-of-hours clubs surveyed, 63% plan to increase fees and 40% will add extra charges for services, such as lunch and trips. Two-fifths will scale back staff training and 70% plan to spend less on equipment and resources. Almost a quarter plan to relax adult-to-child ratios.

“There is a crisis looming,” said Neil Leitch, EYA chief executive. “Parents and providers know higher ratios mean higher-quality childcare. Any relaxation of ratios will create a two-tier sector – those who can afford it have access to the right level of support and those who can’t, don’t.”

Nurseries in deprived areas, where parents cannot afford to cover the shortfall in government funding rates, are among the least financially viable. Children with special educational needs and disabilities are also less attractive to providers now: 15% said they plan to offer fewer places to these children over the next 12 months, reducing the need for specially qualified staff. “We will see marginalisation of some segments of the community. So if your child has special needs or you’re poor, you’re shifted off somewhere else,” Leitch said. “There is not enough funding and the government turns a blind eye to it.”

Last week Ofsted revealed that 1,000 childminders left the sector in the last four months of 2018, representing a 3% fall in numbers. Fewer than 40,000 now remain in business.

Tracy Brabin, Labour’s shadow minister for early years, said: “When settings are forced to reduce staff, the quality of education children receive suffers. It’s time the government listened and acted.”

Tracy Brabin, Labour’s shadow minister for early years, said: “It’s time the government listened and acted.” Photograph: Alecsandra Raluca Drăgoi/The Guardian

There used to be 19 staff at Little Angels nursery in Uppingham in the east Midlands, but three were made redundant in the past year. Owner Lucy Lewin sold her home and borrowed £50,000 to invest in her business, but can’t break even on the rates the government pays her. She is operating at 40% capacity after she put up her fees to fill the funding shortfall,and lost 70 clients. On Monday her costs will increase by £1,000 a month after the minimum wage rises.

Lewin’s financial situation is taking its toll on her health. “I’ve been diagnosed with stress-induced irritable bowel syndrome. My consultant told me I need to reduce my stress levels,” she said.

She has trouble sleeping and works long hours. “There are days I would rather stack supermarket shelves. But I have a family to support, and the children in my nursery need me. We’ve got a lot of families whose children are under protection plans. If we weren’t here, they would have nowhere to go. We are that link between those children being safe and their parents coping.”

A Department for Education spokesperson said: “We are investing around £3.5bn on our early education entitlements this year alone – more than any previous government – to help parents with their childcare costs so that every child has access to a high-quality early education.”

“We recognise the need to keep our evidence base on costs up to date. We continue to monitor the market closely through a range of projects which provide insight into various aspects of the market, including staff costs.”

• This article was amended on 2 April 2019 to clarify that it refers to the situation in England, not the whole of the UK.

In the UK, Samaritans can be contacted on 116 123 or email jo@samaritans.org. In the US, the National Suicide Prevention Lifeline is 1-800-273-8255. In Australia, the crisis support service Lifeline is 13 11 14. Other international suicide helplines can be found at www.befrienders.org.