Will the Autumn Budget push the social care sector beyond breaking point?

As the dust settles on the new government’s first budget since taking office, the enormity of its potential impact on social care is coming into focus. While the budget introduced measures to raise much-needed money for hard-pressed public services – in particular the NHS – social care was not so much left out in the cold as pushed right to the edge of a cliff.

Already fragile after Covid, runaway inflation and a decade of deep cuts to funding, the near 18,000 organisations that provide care in England now fear they will be pushed over the edge of financial viability when the changes to the Employer National Insurance Contributions (ENICs) regime announced in the budget kick in. We estimate that the ENICs changes will cost independent sector social care employers in the region of an additional £940 million in 2025/26, on top of around £1.85 billion more that will be needed to meet new minimum wage rates from April 2025 also announced in the budget.

What measures did the government introduce?

The budget ushered in a number of employment changes that will have a profound impact on this vital sector. Employing almost 1.6 million people, it is made up of a mix of non-profit and for-profit organisations, 98% of which are small and medium sized. The vast majority of these organisations are in the independent sector (which includes both for- and non-profit), so will not qualify for the financial support put aside to cover ENIC increases in the public sector.

A more generous Employment Allowance, also set out in the budget, will help to soften the blow slightly. Under the new regime, from April 2025, employers (regardless of size) will not pay the first £10,500 of their bill, up from £5,000 and with wider eligibility. Even so, we estimate that the combination of the 1.2 percentage point rise to the ENIC rate, and the lowering of the earnings threshold at which employers have to start paying from £9,100 to £5,000, will add around £940 million more to the ENIC bill for independent sector social care organisations in 2025/26 compared to under the current regime (see the methods section at the end of the blog for more detail).  

An uplift of 6.7% to the National Living Wage (the minimum wage for people 21 and over) also formed part of October’s budget and will benefit a large proportion of this low paid workforce. Over half the workforce (59%) employed by independent sector social care providers in March this year were paid less that the current minimum wage that took effect in April.

While a further uplift to pay will be welcomed by staff, and was likely anticipated by employers, we estimate it will add around £1.85 billion more to the total wage bill compared to the current year, assuming that all wages above the National Living Wage also rise at a roughly similar rate to maintain differentials in earnings, as has been the case in previous years (see methods section for more detail on our assumptions).

When the impact of the National Living Wage and the ENIC changes are added together, the 17,732 independent sector providers of social care face additional costs of almost £2.8 billion in 2025/26. To plug that gap and remain financially viable, providers broadly have three options: a) they absorb the costs, b) they pass the costs onto people who pay for, or top up, care themselves, or c) they ask local authorities to pay higher fees for those eligible for publicly funded care (or a combination of the three).

With most organisations running on low margins, absorbing additional costs on a grand scale will only be feasible for the very largest providers, which make up only 2% of the market. Because local authorities already often pay fees for care that are below sustainable levels, to remain financially viable many providers cross-subsidise by charging higher fees to people who pay for their own care. Their ability to pass further costs on to people who pay for some or all of their own care will significantly vary by region and individual organisation. Providers will be turning to local authorities to raise the fees they pay to represent the true cost of care.

Will extra funding shore things up?

The budget earmarked “at least” £600 million more in 2025/26 for local authorities for social care (councils have discretion over how they allocate it between children’s and adults’ services). The exact amount won’t be confirmed until the Local Government Financial Settlement (the final version of which is usually published in February), but the government was keen to point out that, assuming council tax receipts will increase by a maximum of 5%, overall council spending power is set to rise by around 3.2% in 2025/26. That represents an increase of just over £2 billion in additional funding for all services. When set against the rising costs of care, it’s clear that things do not add up.

We estimate that local authorities currently purchase just over 70% of all care delivered by the independent sector in England, so their financial health is critical to determining the sustainability of providers. If local authorities were to raise the fees they pay to providers in 2025/26 to recognise the increased cost of care, they would need to spend around an additional £2 billion on the adult social care they commission in 2025/26 (approximately £665 million for ENICs and around £1.3 billion for the National Living Wage uplift), quickly swallowing up almost all the extra funding flowing to councils. Councils will clearly face some extremely tough decisions.

Recent ADASS surveys have underlined how precarious council finances are. Local authorities are set to overspend on social care by around £564 million in this current financial year, and 37% say they are planning to draw on non-recurrent sources (e.g. reserves) to prop up budgets. The Health Foundation estimates that an additional £1 billion would be needed next year just to keep pace with demand for adult social care, let alone make any improvements.

In this context, it is difficult to see how councils will be able to increase the rates they pay for care sufficiently to enable providers to make financial ends meet. Providers will face their own tough decisions. If they can’t increase fees sufficiently, they may look to cost-cutting measures, such as cutting more experienced highly paid staff, reducing staff hours, or freezing pay for those above the legal minimum wages. Some may opt to leave the council-funded market or choose (or be forced) to close down altogether.

The human cost of market failure

The government, so far, has stood firm in its stance that no non-public organisations are exempt from the new ENIC regime. But as work starts to “save the NHS”, they cannot remain unaware of the likely consequences of the budget for social care.

Indeed, the government was seemingly aware of the consequences of the ENIC change, as a table originally published by the OBR in its Economic and Fiscal Outlook document included a line for “compensation [for ENICs] for public sector employers and adult social care”, along with a provision of £5.5 billion. The table was later corrected, taking out the reference to adult social care and replacing the £5.5 billion with £4.7 billion.

Government officials have not offered an explanation for that £800 million difference but, based on our own calculations, it seems likely that it could have been an official estimate of the likely impact of ENIC changes on adult social care. This suggests that the government is fully sighted on the potentially catastrophic consequences of the budget for social care and how much support would be needed to shore it up.

It is notable that “major adult care provider failure” appears on the National Risk Register, which states that “if unmitigated, it could harm continuity of care for people with care and support needs”. Without additional funding from central government, the combined financial impact of the ENIC rise and the new minimum wage level might see not just single providers going out of business but large swathes of the market collapsing.

And, while “market” suggests institutions, the real and devastating consequences will be felt most acutely by people already drawing on care, whose lives would be disrupted, and by those struggling to access or afford the care and support they desperately need. As the government repeats its line that it is committed to long-term reform, it should be mindful that if it fails to take urgent action to stabilise the sector now, there may be little left of it to reform.