My dd is just finishing her reception year, and won't be 5 (" big girl"!!) for another 6 weeks. She has coped quite well, for most of the year, but I was worried and the school (private) gave us the option of reception or pre-reception for her to start in. We asked dd's nursery for their opinion, as they had moved up to the preschool room earlier than normal the summer birthdays starting in September to get them more used to a school type setting ie no naps. They said go for reception, and we are pleased.
Our problem was that although dd is fine in some areas, she struggles with sitting still and concentrating. She still does, and her report highlighted that she loves talking and gets distracted easily. The reason we thought about holding her back was she has meningitus (sp!!) as a baby and delayed speech (did not say more than a couple of words until 2.5 years, although she is making up for lost time).
There is still a great deal of difference between the older and younger children, we frequently have to explain that so & so can do that but they are older than you, but strangely it is not to do with reading or writing more likely swimming and riding a bike!! Dd has shot up height wise this year, at teh start was in age 3 clothes and the second shortest now in age 5/6 clothes and the upper end of average so does not look that young.
I went on a school trip on Friday and had a group of three (two August birthdays, including dd, and a spring birthday) and there was little difference in ability to read and write. Although, towards the end of the day the youngest two were shattered and dd fell asleep in the coach and I was told to take her straight home not back to class. She also goes to before & after school club, because I work full time, and she has fallen asleep there (they either put her on a sofa/cushions or took her to a mat in prereception if they noticed before she went over).
I know this is a long message, but basically the teacher knows (well should know) everyones date of birth (to make allowances if necessary) although it is more important for them to pitch the work at their ability than age. Dd's school has high expectations of children and dd has been told off before for being naughty (sometimes acting her age or younger othertimes real naughty), but the teacher told us that she is very capable of the work just she struggles getting in done and needs to concentrate more. If your school's policy is all children to start in September, they will be used to the age range and it means that for the start of year 1 the difference will be less than if some started at Easter.