National Insurance Contributions: public sector costs

18 Feb 2025 11:30 AM

Indicative costs of the employer National Insurance Contributions increase on the public sector in Scotland.

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.

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