Chancellor Rachel Reeves has come under mounting pressure from devolved governments after being accused of underfunding Scotland, Wales and Northern Ireland in the wake of her decision to increase employer national insurance contributions (NICs).
The 1.2% rise in NICs for employers on salaries above £5,000, introduced on 6 April, is being covered by the Treasury in England through direct funding. However, for the devolved administrations, Reeves has chosen to apply the Barnett formula to calculate their allocations — a move that has sparked widespread criticism.
Although the formula adjusts funding based on population size, it does not account for the significantly larger public sectors operated by Cardiff, Edinburgh and Belfast. Finance ministers in each of the devolved nations say they have been left with substantial shortfalls and have accused the UK government of breaching the UK’s own Statement of Funding Policy, which prevents one administration from taking actions that financially disadvantage the others.
In Wales, the funding gap is around £72 million annually. Welsh finance secretary Mark Drakeford confirmed the government would take £36 million from reserves to cover half the cost but warned that the remainder — to be borne by local authorities and public bodies — would mean cuts of around 14%. “We have made our position very clear with the Treasury that using the Barnett formula in this instance is a breach of the rules,” Drakeford said. “If this was a one-off, we may have been able to use more of our reserves, but as it is, this will unfairly impact Wales year after year.”
Scotland is facing a significantly larger bill, estimated at £700 million, with the Treasury offering only £339 million in additional funding. In Northern Ireland, where the shortfall is around £200 million, £146 million has been allocated — still well short of the amount needed to meet public sector obligations.
Scottish finance secretary Shona Robison has repeatedly called for the tax rise to be reversed or fully funded. “Failing that,” she said, “we have asked that they fully fund this tax increase to ensure Scotland’s NHS, councils and other public services don’t lose out on vital revenue. It feels like Scotland is now being punished for having decided to employ more people in the public sector and to invest in key public services.”
Northern Ireland’s civil service, operating under long-term financial constraints, has also raised concerns that the Treasury’s contribution does not reflect the true costs facing a devolved administration with one of the highest proportions of public sector workers in the UK.
A Treasury spokesperson defended the government’s position, insisting that the approach was in line with “agreed funding arrangements and longstanding precedent”.
But the decision has reopened debate over whether the Barnett formula, first introduced in 1978 as a temporary fix, remains suitable for a modern devolved UK. Critics say the formula fails to reflect real needs and costs — particularly for nations like Wales and Scotland that rely more heavily on public sector employment.
The row also threatens to deepen a growing divide within the Labour Party. While Labour holds power at Westminster and in Wales, tensions between Welsh Labour and the UK government have intensified. Recent polling suggests Welsh Labour is trailing behind Plaid Cymru and Reform UK in the run-up to next year’s Senedd elections, with only 18% support — a shock result that puts pressure on First Minister Eluned Morgan to demonstrate greater independence from the party’s national leadership.
As the cost of living crisis continues and public services come under growing strain, the funding dispute over national insurance could become a flashpoint in both intergovernmental relations and Labour’s internal cohesion.
