Am I being paranoid

[Umbongo1]

To cut all inside contact (we are tier 1) for a couple of weeks - my nieces teacher tested positive and my niece was here playing with my daughter on Tuesday. It's a bit odd as it sounds like even her immediate household
Don't have to self isolate, just her?!

Only direct contact facts need to isolate, yes, otherwise everyone would be isolating all the time. If, for example, a pupil in Y11 in my school tests positive the year group isolate. If they did what you are asking all their teachers, all their siblings, all their siblings’ year groups, all their families, all the people their families work with, and their families and the people they work with and so on ad infinitum would need to isolate.

Your niece would have had to have been positive and contagious which wouldn’t have been the case since the teacher was just diagnosed. I really wouldn’t worry.