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How Is The NHS Funded? (A Concise Overview)

How Is The NHS Funded? (A Concise Overview)

Updated on: December 3, 2023
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Written By Dr Ollie

Every article is fact-checked by a medical professional. However, inaccuracies may still persist.

The National Health Service (NHS) is a vital institution in the United Kingdom, providing healthcare services to millions of people.

To sustain its essential role in the UK, it is important to understand how the NHS is funded and maintained.

The NHS is primarily funded by general taxation and National Insurance contributions. About 80% of funding comes from general taxation and National Insurance covers most of the rest. A small proportion of the NHS’s funding comes from patient charges, such as for prescriptions and dentistry services.

Established in 1948, the NHS has grown to be the world’s largest publicly funded health service, dedicated to offering comprehensive and inclusive healthcare for all.

Its funding model ensures that the majority of NHS services are free at the point of use for most people, making healthcare accessible regardless of an individual’s financial situation.

Sources Of NHS Funding

The National Health Service (NHS) in the United Kingdom is primarily funded through three main sources: general taxation, National Insurance contributions and patient charges.

Each of these sources plays a vital role in maintaining the overall financial stability of the NHS.

General Taxation

The largest source of funding for the NHS comes from general taxation. It makes up about 80% of total funding.

This category represents funds collected by the government through various forms of taxation such as income tax, VAT, and corporation tax.

A significant percentage of the tax revenue generated by the UK government is allocated to the NHS to support healthcare services- approximately 22%, but the exact figure is difficult to nail down due to variations in how it can be calculated.

Taxes can be raised both by central and local governments.

Local taxation is more often earmarked for a particular purpose or use- for example, the funding of local cancer services.

National Insurance Contributions

National Insurance contributions are another key source of funds for the NHS.

National Insurance contributions are payments made by employees, employers, and the self-employed to contribute to welfare benefits, including the NHS.

The contributions are designed to provide financial support in situations such as unemployment, sickness, disability, and retirement.

In 2003, the UK government increased National Insurance rates to boost NHS funding.

This took National Insurance from 12% of total funding in 2002 to 20% in 2003. It now sits at just under 20% as a proportion of total NHS funding.

Patient Charges

Patient charges form a smaller yet still significant portion of the NHS’s funding sources.

These charges are fees collected from patients for specific NHS services, such as prescriptions, dental care, and some aspects of hospital care.

In 2018/19, England raised £576 million through the prescription charge (0.5% of the NHS resource budget) and income raised through dental charges amounted to £807m.

Although patient charges contribute a smaller amount compared to general taxation and National Insurance Contributions, they provide important additional funding to the NHS.

There are also other, less significant sources of funding that fall under the patient charges umbrella, for example, the charging of overseas visitors and their insurers for the cost of NHS treatment.

What Is The Annual Spending Review?

The annual Spending Review for the NHS in the UK is a comprehensive assessment of the funding and resources allocated to the NHS for the upcoming year.

It is a key process by which the government determines the financial resources that will be provided to the NHS to support its operations, services, and healthcare initiatives.

The government calculates the projected National Insurance contributions destined for the NHS, as well as the anticipated revenue from alternate sources like the mentioned user fees.

Should National Insurance contributions or patient fees fall short of this projection, the predetermined funding level is supplemented through general taxation.

During the Spending Review, the government reviews various factors such as the overall economic conditions, healthcare demands, advancements in medical technology, and the needs of the NHS.

Based on these considerations, they decide how much funding the NHS will receive for different areas, including patient care, staffing, infrastructure development, research, and other healthcare services.

The Spending Review helps set the budget for the NHS, which in turn impacts the level of care and services that the NHS can provide to the public.

It’s an important aspect of healthcare policy and funding decisions in the UK, as it directly affects the resources available to the country’s healthcare system and its ability to meet the healthcare needs of the population.

Funding Challenges For The NHS

The NHS faces persistent funding challenges that stem from factors such as growing demand for services, historical underinvestment, and workforce pressures, all of which impact its ability to provide quality healthcare to the population.

NHS Funding Challenges Pixel Infographic

Growing Demand For Services

Growing demand for services represents a funding challenge for the NHS due to several interconnected factors:

  1. Increasing And Ageing Population: As the population grows and ages, the demand for healthcare services naturally increases. Elderly individuals typically require more medical attention and ongoing care, and larger populations mean more people accessing healthcare.
  2. Complex Health Needs: Modern healthcare faces increasingly complex medical conditions, which often require specialised treatments, advanced technologies, and more extensive resources. This complexity can drive up the cost of care.
  3. Public Expectations: As healthcare awareness and information availability grow, patients expect higher standards of care. They may demand a broader range of services, quicker access to treatment, and improved overall quality of care.
  4. Chronic Conditions: Chronic diseases like diabetes, heart disease, and respiratory issues are on the rise. Managing these conditions requires ongoing care, which can strain healthcare resources and increase costs.
  5. Mental Health Services: The demand for mental health services has also increased. Mental health issues are now recognised as significant health concerns, and addressing them effectively requires additional resources and expertise.

When the demand for services outpaces the rate of funding growth, the healthcare system can face challenges such as longer waiting times for treatments, reduced quality of care, and resource shortages.

Chronic Underinvestment

The NHS faces the biggest funding challenge in its history, with chronic underinvestment in infrastructure, technology, and resources.

This has resulted in a widening gap between the quality of care that could be achieved and the current services offered.

Here’s how past underinvestment contributes to the current funding challenges:

  1. Infrastructure Deficits: Lack of sufficient funding in the past has resulted in outdated and inadequate infrastructure within the NHS. Ageing hospitals, outdated equipment, and inadequate facilities can lead to inefficiencies, longer waiting times, and challenges in delivering modern healthcare services.
  2. Backlog of Maintenance and Upgrades: Underinvestment can lead to a backlog of maintenance and necessary upgrades. This means that a significant portion of the budget might need to be directed towards catching up on these essential improvements, leaving less funding available for current needs and innovations.
  3. Innovation and Technology: Inadequate funding can hinder the adoption of new medical technologies, treatments, and innovations. Keeping up with medical advancements is essential for providing high-quality care, but underinvestment can slow down progress in this regard.
  4. Financial Sustainability: Chronic underinvestment can weaken the financial sustainability of the NHS. It might lead to the need for short-term fixes or emergency funding injections, diverting resources from long-term planning and investments.

Addressing the consequences of past underinvestment requires substantial financial commitments to modernise infrastructure, invest in innovative technologies, and improve access to care.

Workforce Pressures

In addition to increased demand and underinvestment, the NHS faces workforce pressures.

With an insufficient number of healthcare professionals to meet the demands of growing and diverse patient populations, the following funding challenges are thrown up:

  1. Recruitment and Training Costs: The process of recruiting, training, and retaining healthcare professionals involves considerable financial investment. This includes costs related to advertising vacancies, conducting interviews, providing training programs, and ensuring ongoing professional development.
  2. Higher Wages and Benefits: A scarcity of healthcare professionals can lead to increased competition among healthcare institutions to hire and keep skilled staff. To remain competitive and attract qualified candidates, the NHS might need to offer higher wages and enhanced benefits, which can strain the budget.
  3. Agency and Overtime Costs: When there aren’t enough permanent staff members to meet patient demands, healthcare organisations often rely on agency staff or require existing staff to work overtime. Both of these options tend to be more expensive than employing full-time, permanent staff, thereby increasing labour costs.
  4. Burnout and Turnover: High workload and long hours due to staffing shortages can lead to burnout among healthcare professionals. Burnout not only affects staff well-being but also increases turnover rates. Replacing experienced staff requires additional recruitment and training costs.

Without sufficient funding to tackle these challenges, the NHS might struggle to attract and maintain a skilled workforce, leading to ongoing issues with quality of care, patient access, and overall healthcare system performance.

Final Thoughts

With rising demand for healthcare services and increased financial pressures, the future of NHS funding faces certain challenges and potential changes.

In the coming years, the focus on integrated care systems (ICS) is expected to intensify.

This new approach combines resources across various health and social care organisations, aiming to improve efficiency and coordination while reducing service fragmentation.

At the same time, the UK government has committed to increasing total health spending for the NHS, after a period of the longest funding squeeze in NHS history between 2009/10 and 2018/19.

It remains to be seen whether this extra funding will be sufficient to meet the growing demands on the NHS or whether alternative funding sources might be needed in the future.

About the author
After studying medicine at the University of Leicester, Dr Ollie now works as a junior doctor in London. His interests include medical education and expedition medicine, as well as having a strong belief in the importance of widening access to medicine.