Everything in the Budget for higher education

Rachel Reeves’ first budget as Chancellor of the Exchequer was not the budget that many in the sector were hoping for.

There was hope that the announcement would include a fee increase, a restructuring regime, or other new funding for higher education, but that looks like it will need to wait for another day.

However, major fears about research funding proved wide off the mark – Horizon Europe affiliation will not be taken from other parts of the research budget, as had been feared.

For the moment, the main concern for university finance teams will be finding the money to cover the increase in employer national insurance contributions. There’s also been some tweaks to the lifelong learning entitlement implementation plans, and confirmation that classroom-based foundation years will be defunded.

Forecasts

In the absence of any actual new policy specifically around higher education, the OBR’s forecasts roll on from those it made in March – and those made the following assumptions (based on existing policy) that have been recalculated in its projections:

• Freezing maximum tuition fees until academic year 2024-25 before reverting to rising by RPIX inflation (this is the end of the Theresa May fee freeze). The OBR forecasts that to be 3 per cent in Q1 2025 (which would yield a new maximum fee cap of £9527.50).
• The existing maintenance system will have its undergraduate maximum (along with PG loans and DSA) raised by the Q1 2025 RPIX projection – again, assumed at 3 per cent (although the parental income threshold is assumed to remain at £25,000, where it’s been since 2007).
• The persistence of lower repayment thresholds – thresholds for existing borrowers are kept at £27,295 to 2024-25 and then rise by RPI.
• For new (Plan 5) borrowers, thresholds are £25,000 in 2023-24 and then held constant until 2026-27, and then also rise by RPI.

That suggests that any changes announced between now and mid-January will need to be carried out in a way that takes the same-sized envelope, and spends it in a different way.

The DfE envelope

The budget marks the completion of “phase 1” of a spending review, so each department now has an allocation of funding for 2025-26. All spending until that date, therefore, would have to happen within the envelopes set out today.

For the Department for Education, resource spending will increase by £11.2bn during that period – to a total of £93bn. The big ticket items from the new allocation are the core schools budget (£2.3bn), childcare (£1.8bn), and further education (£300m).

DfE will also see £6.7bn of capital funding for 2025-26 – of which £1.4bn goes to school rebuilding, £2bn for schools maintenance, and £950m on skills capital.

You will note the absence of any new funding earmarked for higher education (either capital or recurrent) in 2025-26. This suggests that any changes to higher education core funding, or other sizable interventions into the sector, will not happen before 2026-27.

National insurance

The biggest tax change was the most widely trailed, the increase in Employer National Insurance Contributions (NICs) from April 2025. The secondary earnings threshold (the point at which employers begin paying NICs) will fall from £9,100 to £5,000 and the main rate at which NICs will be paid rises from 13.8 to 15 per cent. This is compensated by a rise in the Employment Allowance for smaller employers, and noted in budget calculations for the public sector.

The issue here is one familiar to fans of the Teachers’ Pension Scheme – there is no specific funding allocated to universities and other higher education providers to cover these additional costs. And these are potentially significant costs – if you have 100 employees earning £30,000, then as an employer you must pay an additional £86,500 each year in NICs. The plans will particularly hit the employment costs of part-time staff – if you employ someone contracted to hours and rates yielding £10,000 a year in salary, you will be paying an extra £625.80 in employer NICs in April compared with current rates.

The Universities and Colleges Employers Association has calculated that this measure will add around £372m to the sector’s pay bill.

The increase to the “national living wage” (the former minimum wage) will also have a small impact on universities as employers. The new JNCHES offer already on the table provides for increases in the living wage (largely local adjustments to a few spine points) so these changes should be priced into employer plans. These will continue to be modified (and spine points deleted) over the course of future rises and the planned equalisation of the various living wages for those aged 18 and over. Students’ unions, on the other hand, will be particularly squeezed.

Foundation years

It looks like the planned reduction to maximum tuition fees for foundation year provision will be in place for the 2025-26 academic year. This policy was designed by the previous government to cut spending on classroom-based foundation years (a contested definition) from £9,250 to £5,670. It has been predicted that some providers will offer CertHE (L4) qualifications for those existing a four year course after year one, instead. Those incurring costs at around the current cap may also choose to leave this part of the sector to lower cost franchise and partnership provision.

LLE and skills

The Lifelong Learning Entitlement, once planned to be in place from September 2025, will now be available from September 2026 for learners studying courses starting on or after 1 January 2027 (page 86 of the main budget document). Under the most recent plans under the last government these deadlines applied to the full range of LLE-eligible provision, with only certain higher technical modules available from 2025 for January 2026 start.

It would be hard to find anyone that was seriously expecting a 2025 start to the LLE, the delay gives further time to build capacity and infrastructure – and, indeed, further evidence of learner demand for loans covering fees for short courses. For whatever it is worth, the government remains “committed to delivering the LLE” – though any mention of the ill-starred short courses trial has now been removed from the policy paper.

Revised documentation already reveals a couple of notable shifts in language. The “why we need the LLE” section has had a complete rewrite, focusing now on Labour’s opportunity mission rather than the Conservatives’ Augur-informed “fit study around work” badging. There will be an as-yet not fleshed out role for Skills England in ensuring that the LLE aligns to the government’s skills priorities.

As previously indicated, the LLE will not replace Advanced Learner Loans – these will still be available for providers not registered with the Office for Students. We are also told that DfE is “working closely with OfS towards the implementation of a full regulatory approach for a third category of provider”. Details will follow “in due course”.

There’s also a small pot of money – some £40m – going to the development of the Growth and Skills Levy. This will be put towards the “foundation apprenticeships” at lower levels which were announced at party conference along with the suggestion that they would be funded through some kind of reforms to level 7 apprenticeships. The detail will all have to wait for ironing out by Skills England.

Research and development

The budget commits the government to protect levels of R&D investment – with £20.4bn allocated for 2025-26. At least £6.1bn of this will cover what is termed “core research” – Research England, Research Council, UKRI talent, UKRI international subscriptions, and National Academies funding. Contrary to some speculation, the £2.7bn for association to EU research programmes (including Horizon Europe) and the Horizon Europe guarantee scheme is a separate line item – don’t worry, it isn’t a UKRI international subscription.

New funding includes at least £40m over five years for spin-out proof of concept funding, and wider improvements to support for researchers involved in spin-outs. Innovation acceleration programmes will be extended in Glasgow City Region, Greater Manchester, and the West Midlands – the UK Shared Prosperity Fund will continue for a further year (at £900m) and there will be at least £25m for a new R&D missions programme.

The manifesto’s 10 year budgets for key R&D activities will have to wait for phase 2 of the spending review. And “final” approval has been granted for the long-awaited East Midlands Investment Zone (supported by local businesses and research partners including the University of Derby, University of Nottingham, and Nottingham Trent University).

We also learn that of the research and development tax credits awarded in 2021-22 (£7.6bn) some £1.3bn (17.6 per cent) were potentially fraudulent – with the majority of questionable claims (£1.2bn) within the SME scheme.

Private school VAT

The regulations underpinning this manifesto promise will now explicitly exclude higher education from the VAT rise: “Higher Education (HE) taught at schools that are otherwise in scope of the policy (for instance, performing arts schools) will be carved out of the VAT policy”. Here’s the VAT notice.

Distributional illusions

One final note on the Treasury’s analysis of the overall distributional impact of the budget on households.

As we’ve pointed out before, it uses DWP household income figures which count student tuition fee loans as income – so a shared house of four undergraduates looks £37k better off than it really is, and a household on £25,000 with a commuter student in it looks like it’s on £34,250. It’s worse if a household has a student who’s taken out a PG loan. We might have hoped that this silly fiddle would get fixed with a new government – it hasn’t yet.