I'm not sure about the over allocation bit, but I do know that funding before age 4 does depend on postcode. The idea is that postcodes deemed to be in needy areas are given funding.
This however does have many anomolies, because I know that friends of mine who live in an affluent area do qualify, so I'm not sure who makes the rules!
The following is an extract from a factsheet issued by our local government department responsible for the grants:
'Unfortunately the amount (of money allocated locally) does not allow a place for every three year old child so a system of allocation has been put into place. The Early Years Development and Childcare Partnership has followed the indices of need and decided on a number of postcode areas, three year old children living in these areas will be entitled to free pre-school education.
All four year olds are entitled to free pre-school provision from the term following their fourth birthday, subject to national cut off dates, regardless of the post code area in which they live.
The entitlement to free pre-school education starts from the September following the child’s third Birthday and continues for up to three terms. Your child must be three on or before 31st August of that year.'
You can see from the above, that even if you qualify by postcode, you may not get the funding if your child's birthday does not fall within the required dates, (as mine doesn't)
I hope this helps. Perhaps your local people have a similar factsheet. I have the whole sheet if you want it, post your email address.