The National Health Service (NHS) in the United Kingdom is one of the world’s largest publicly funded health systems, providing a wide array of services including hospital care, general practitioner consultations, mental health support, ambulance services, and community health programs. The efficient and equitable funding of the NHS is essential to ensure ongoing access to quality healthcare for the UK population. This article provides a detailed examination of the NHS funding system, focusing primarily on England, where the majority of NHS expenditure takes place. Drawing upon the latest data for the fiscal year 2023/24 and projections through 2028/29, it explains how public revenues finance the NHS, how funds are allocated and distributed, the impact of ongoing reforms, and the challenges facing the system.
Sources of NHS funding
NHS funding in England derives predominantly from public revenues, chiefly through general taxation and National Insurance (NI) contributions. The Department of Health and Social Care (DHSC) is responsible for managing the overall NHS budget and distributing funds. For the fiscal year 2023/24, the DHSC was allocated approximately £188.5 billion, covering a broad range of health and social care services. The vast majority of this—about 94.4% (£177.9 billion)—is dedicated to day-to-day operational expenditures, such as staff salaries, medicines, equipment, and routine services. The remainder is allocated to capital expenditure, used for infrastructure development, including building new hospitals and upgrading medical facilities.
Within the DHSC budget, roughly £171 billion is allocated directly to NHS England to deliver frontline health services. The remaining funds finance central functions within DHSC and associated bodies such as the UK Health Security Agency. This funding architecture ensures that the NHS operates within government spending priorities set primarily through Spending Reviews and Budget statements, which set multi-year spending envelopes for health and social services.
Historical and projected NHS spending trends
Health spending in England has historically grown over the decades. Since the mid-1950s, real term growth averaged approximately 3.7% per year, reflecting expanding health needs and advances in medical care. However, between 2015/16 and 2023/24, funding growth slowed to around 2.3% annually in real terms, partly due to austerity measures before and after the 2010s and the fluctuating demands imposed by the Covid-19 pandemic’s resource-intensive response.
Looking forward, the government’s 2025 Comprehensive Spending Review projects a continued increase in health spending, estimating a real-terms annual uplift of around 2.7% per year through to 2028/29. Notably, NHS funding is expected to rise slightly faster than the overall DHSC budget, at approximately 3.0% average growth annually over the next three years. This reflects government commitments to bolster health service capacity, accelerate recovery of elective care services delayed by the pandemic, and invest in long-term infrastructure and modernization projects.
How NHS funding is allocated and distributed?
The National Health Service (NHS) in England receives its funding through a carefully managed allocation system designed to ensure that resources are distributed fairly and according to the varying health needs of different regions. After the Department of Health and Social Care (DHSC) sets the total budget available for the NHS, NHS England assumes the responsibility of acting as the principal commissioning body. It directs the majority of funds to Integrated Care Boards (ICBs), which are organizations tasked with planning, commissioning, and coordinating health services for defined geographic populations. This system, introduced to bring decision-making closer to local populations, allows for more responsive and needs-based distribution of resources.
For the fiscal year 2025/26, NHS England detailed the allocation frameworks for ICBs, specifying the financial resources each board will receive. These allocations are determined through a complex and evidence-based formula that aims to promote fairness and reduce healthcare inequalities across the country. The formula incorporates numerous factors, starting with the local population size and demographics such as age, sex, and projected growth, which are essential in predicting healthcare demand. Populations with larger numbers of older individuals or children, for example, typically require more healthcare resources, so their ICBs receive higher allocations.
Beyond basic demographics, the allocation process integrates extensive health needs assessments using data on disease prevalence, mortality rates, and long-term conditions. Areas with higher burdens of disease or chronic illnesses are awarded higher funding to accommodate increased service use. The inclusion of social deprivation indices acknowledges the link between socioeconomic disadvantage and poorer health outcomes. Regions facing greater deprivation receive additional funds, reflecting the extra support they require to address health disparities and barriers to care.
A major component of the funding formula includes adjustments for regional cost differences represented by the Market Forces Factor (MFF). The MFF compensates healthcare providers in expensive urban areas, especially London and the South East, where operational costs such as staff salaries and property expenses are naturally higher. This ensures that providers in high-cost regions have sufficient resources to maintain service quality without financial disadvantage compared to providers in lower-cost areas. Other tailored adjustments address specific service pressures within regions, such as emergency ambulance demand, mental health services, maternity care, and community health needs. These nuanced modifications enable NHS England to fund services more precisely, reflecting real-world variations in healthcare delivery needs.
The effects of this allocation formula become visible through varying funding levels per patient across ICB areas. For example, recent data has shown that some ICBs with populations experiencing higher deprivation or complex health demands receive notably higher per capita funding compared to those in more affluent or less dense areas. This approach is pivotal in striving to reduce health inequalities and ensure underserved communities receive appropriate support.
Funding is separated into multiple streams to support the different layers of healthcare provision. Core services encompass general and acute hospital care, mental health, and community services. Specialized services involve highly complex or rare treatments commissioned on a national or regional basis but delivered locally. Primary medical care funding supports general practitioners, pharmacies, dentists, and optometrists, essential components of frontline healthcare. Furthermore, running costs are allocated to ICBs to cover administrative and operational expenses necessary to manage and deliver services effectively.
Beyond the core allocation process, NHS England invests strategically in specific areas through designated funds. For instance, the Primary Care Utilisation and Modernisation Fund allocated £102 million in capital funding for 2025/26, enabling ICBs to develop and modernize their primary care infrastructure. ICBs prioritize projects based on local needs, supported by NHS England’s assessments, ensuring alignment with national health objectives while addressing unique regional challenges.
The financial arrangements governing NHS funding continue to evolve with reforms aimed at improving stability and incentivizing better care outcomes. From the 2026/27 financial year onwards, the NHS plans to move away from block contracts, which guarantee fixed payments irrespective of patient volumes, toward payment models that link funding more closely to the quality and quantity of care delivered. This shift aims to increase efficiency, enhance provider accountability, and ensure resources respond to actual service demand, promoting sustainability in the long term.
Patient involvement is also becoming an important consideration within the funding system. Pilot programs like Patient Power Payments are testing whether patient experience metrics can influence provider payments, encouraging healthcare organizations to prioritize patient-centered care and improve service quality based on direct feedback.
While the NHS remains primarily funded through government revenues, a small portion of overall funding—approximately 1%—comes from patient charges for services such as prescriptions, dental care, and eye treatments. Though these contributions provide some cost recovery, they form a minor fraction compared to the vast public funding.
Despite rising investment and sophisticated allocation mechanisms, financial challenges persist within the NHS system. Many NHS trusts and Clinical Commissioning Groups have struggled with budget deficits due to increasing demand, workforce shortages, inflationary pressures, and underinvestment in infrastructure in previous years. NHS England’s financial plans include measures to support these organizations in achieving balanced budgets by promoting efficient resource use and adapting funding models to better reflect local needs.
The NHS funding allocation and distribution process in England represents a detailed and dynamic system grounded in data-driven formulas and targeted adjustments to balance resource distribution with population health needs, cost variations, and inequality reduction. By channeling funds through Integrated Care Boards using transparent and rigorous methods, the NHS aims to deliver equitable, efficient, and high-quality care across diverse communities. Future reforms and strategic investments continue to shape this system, as the NHS responds to evolving healthcare demands and priorities, maintaining its commitment to serving the population through an integrated and financially sustainable model.
Financial management and reform of NHS funding
The DHSC issues detailed financial directions to NHS England outlining principles and limits for the use of allocated resources. In recent years, there has been a shift toward longer-term funding settlements to provide more financial predictability and encourage strategic investment. From the 2026/27 financial year, operational budgets are scheduled to span three years, with capital budgets covering four years initially and moving to rolling five-year capital budgets by 2029/30.
A major NHS reform planned for implementation beginning 2026/27 is the ending of block contracts—traditional payment mechanisms that guarantee NHS providers a set budget regardless of patient volumes. Instead, the NHS will transition to payment models linking funding explicitly to quality and volume of care delivered, encouraging efficiency and responsiveness. These reforms are designed to improve accountability, reduce wasteful spending, and better align resources with patient outcomes.
Furthermore, the ongoing focus is to target funding more precisely toward areas with higher health inequalities and deprivation, advancing government priorities to close longstanding gaps in health outcomes across the country.
Patient involvement in funding decisions
To promote greater patient-centered care, pilot initiatives such as Patient Power Payments are being trialled. These programs experiment with incorporating patient experiences and satisfaction metrics into funding allocations for care providers. By linking some payments to patient feedback, these schemes seek to incentivize improved care quality from providers.
Additionally, new Foundation Trusts will assume increased financial autonomy, particularly in capital spending. They will be able to self-fund capital investments from operating surpluses rather than relying on direct capital allocations from NHS England, encouraging locally driven, efficient investment decisions.
While the NHS is predominantly publicly funded, a small portion—approximately 1% of the DHSC budget—is recovered through patient charges. These fees apply to specific services including prescriptions, dental treatments, and eye care. Such charges contribute marginally to funding and serve primarily a modest cost-recovery function rather than a significant revenue source.
Financial challenges and NHS deficits
Despite sustained growth in funding, many NHS trusts and Clinical Commissioning Groups (CCGs) have encountered difficulty achieving financial balance. Recent years saw widespread budget deficits, with some organizations overspending relative to their allocations. These financial pressures stem from rising care demand, workforce shortages, inflationary costs, and infrastructure backlogs.
NHS England has developed long-term strategies to tackle these issues, including:
- Revamped payment models linking funding to efficiency.
- Strengthened oversight and financial control measures.
- System-wide initiatives to reduce unwarranted variation in care costs.
- Encouragement of integrated care models to reduce duplication and fragmentation.
The goal is to return NHS providers and commissioning bodies to balanced financial positions by 2023/24, sustaining service delivery while maintaining fiscal responsibility.
NHS funding in the UK—especially in England—is a publicly financed system anchored by general taxation and National Insurance contributions. The Department of Health and Social Care sets the overall budget, which NHS England receives and distributes to Integrated Care Boards through a complex formula designed to reflect population health needs, regional cost differences, and social factors.
Future reforms including longer-term funding commitments, the transition away from block contracts, and pilot programs linking funding to patient outcomes represent attempts to increase financial sustainability, reduce health inequalities, and improve care quality. Despite challenges such as persistent organizational deficits and rising demand pressures, the NHS funding framework continues to evolve, supported by increasing budgetary allocations averaging 2.7% real growth annually through 2028/29.
Through these systemic adaptations, the NHS strives to ensure its financial resources are efficiently managed and targeted effectively to meet the healthcare needs of the UK population both now and in the future.