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) estimates that this will raise £23.8 billion in financial year 2025 to 2026 in total. £4.7 billion will 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 the Scottish Government calculated the cost to the public sector in Scotland as around £500 million in financial year 2025 to 2026.

The new costings presented in this note provide a costing based on returns from Scottish Government portfolios and organisations, and represents 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 £580 million in financial year 2025 to 2026 for directly employed public sector employees in Scotland’s devolved public sector, with a central estimate of £550 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 £265 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 and the third sector. Initial estimates include £45 million for universities, £20 million for colleges, £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 latest estimate on the potential Barnett consequentials is up to £380 million, calculated from an 8% share of the £4.7 billion UK total. This estimate is subject to a high degree of uncertainty and could be much lower than that, for example if some of the additional funding does not generate consequentials as it is not part of comparable spending lines. Equally, HM Treasury could choose to increase the overall sum available, or award consequentials outside the normal operation of the Barnett formula.
• the Scottish Government continues to work to refine these costings.

• this suggests a potential shortfall of around £140 million to £200 million.

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

Sources and Limitations

• the data was collected between 8 November and 15 November 2024. Portfolios and organisations were asked for an estimate of the additional NICs costs in financial year 2025 to 2026, alongside information on salaries, NICs costs and headcount in 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; the pace at which the information was collected following the UK Budget leaving limited time for detailed validation; 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	265
NHS boards	191
Police	25
Fire and Rescue Service	5
Prison Service	6
Transport Bodies (including rail)	12
Scottish Government	10
Other	34
Total	549

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
Colleges	20