National Insurance Contributions: public sector costs

Background

On 30 October 2024, the Chancellor of the Exchequer announced that the secondary Class 1 rate of employer National Insurance Contributions (NICs) will increase from 13.8% to 15% from 6 April 2025.

The Secondary Threshold at which employers start to pay secondary Class 1 NICs will be reduced from £9,100 to £5,000.  

The employment allowance, which allows eligible employers to reduce their NICs liability, will be increased from £5,000 to £10,500.

The Office for Budget Responsibility (OBR) estimated that these changes will raise £23.8 billion in the financial year 2025 to 2026 in total. £4.7 billion are estimated to be allocated to compensate public sector organisations.   

This note sets out the costs of the policy to the Scottish public sector based on newly collected data. 

Following the announcement, in October 2024 the Scottish Government calculated the cost to the public sector in Scotland as around £500 million in the financial year 2025 to 2026.

The new costings presented in this note provide a costing based on data collected from Scottish Government portfolios and organisations, and represent our best understanding of the pressures at this point in time.

Key findings

• the data collection suggests that the static increase in employer NICs might cost between £520 and £550 million in the financial year 2025 to 2026 for directly employed public sector employees in Scotland’s devolved public sector, with a central estimate of £535 million.*
• this includes around a £191 million cost to the NHS and £37 million cost to Police, Fire and Prison services (see Table 1).
• the estimate of a £240 million cost to local government (including teachers) was provided by the Convention of Scottish Local Authorities (COSLA).
• the costs could be substantially higher when including contracted out services. Initial estimates include £45 million for universities, £40 million for NHS contractors including GPs, dentists, optometrists and pharmacists, and £84 million for adult social care (see Table 2). This list is not exhaustive, and does not cover all contracted out public services.

* the definition of who is in scope is based on ONS classification of the entity paying employer NICs. This applies to employees who are directly employed by the public sector, but not, for example, where services are contracted out.

Implications for the Scottish Budget

The First Minister and President of COSLA wrote to the Chancellor on 3 January 2025, supported by 48 public and voluntary sector organisations to raise concerns at the impact of the increase to employer National Insurance contributions and to seek clarity on funding.

The Chief Secretary to the Treasury wrote to the Cabinet Secretary for Finance and Local Government on 24 January 2025 confirming that the Scottish Government would receive funding based on the Barnett formula with the final amount still to be confirmed. 

Media reports from November 2024 suggested that Scotland would receive between £295 million and £330 million extra to pay for additional public sector staff costs.

There has been no indication that additional funding will be provided to support contracted out public services or the third sector.

If the UK Government’s reported allocation is accurate, there could be a potential shortfall of over £400 million.

Sources and Limitations

The data was collected between 8 November 2024 and 10 February 2025. Portfolios and organisations were asked for an estimate of the additional NICs costs in the financial year 2025 to 2026, alongside information on salaries, NICs costs and headcount in the financial year 2023 to 2024, the latest outturn year, to allow validation of estimates. The response rate was over 99% for directly employed workforces.

There remains a degree of uncertainty around this estimate because of potential inconsistencies in how different organisations calculate the impact and the uncertainty about future pay settlements and staffing projections.

There is also incomplete information on contractor and third party sector costs, and therefore a cumulative estimate is not available.

Detailed tables

Table 1: Estimated static costs as a result of UK employer NICs policy changes to the directly employed devolved Scottish public sector workforce

Workforce (directly employed)	Increase in NICs bill in financial year 2025 to 2026 as a result of UK policy changes (£ million)
Local government	240
NHS boards	191
Police	25
Fire and Rescue Service	5
Prison Service	6
Transport Bodies (including rail)	12
Scottish Government	10
Colleges	12
Other	34
Total	535

Figures might not sum due to rounding.

Table 2: Estimated static costs as a result of UK employer NICs policy changes to increase in NICs bill for selected contractors and third parties

Workforce	Increase in NICs bill in financial year 2025 to 2026 as a result of UK policy changes (£ million)
NHS contractors	40
Transport including network rail	12
Adult Social Care	84
Children's Social Care	4
Early Learning and Childcare	5
Universities	45