Scotland has 19 higher education institutes, including the Open University, each with their own specialisms and mix of students. The university sector in Scotland is an important economic contributor,with a London Economics report commissioned by Universities UK estimating the economic impact from Scottish universities to be c.£17 billion annually from teaching, research and innovation activities.
Home students in Scotland benefit from the Scottish Government’s commitment to no tuition fees for those who choose to undertake their (first) undergraduate degree in Scotland. In 2022-23, Scottish students made up c.60% of the total student population in Scottish universities according to statistics from the Higher Education Statistics Agency. Yet it is the other 40% of students from UK and overseas that account for c.85% of total fee income for Scottish universities. This puts a spotlight on the critical role non-Scottish students play in propping up the higher education sector in Scotland in its current funding structure.
Student enrolment numbers
Universities Scotland reported a fall in the enrolment of international students in the 2023-24 academic year. The result was a cumulative funding impact on Scottish universities of c.£100 million in that year. Even more concerning for Scottish universities – and associated sector players, such as developers of private student accommodation – was that this drop was not expected to be a one-off anomaly. Instead, it indicates a long-term trend post-Brexit, UK Government dependents visa changes, and other international jurisdictions providing more cost-competitive higher education offerings at comparably ranked institutions.
Public sector funding for teaching
The Scottish Government’s 2025-26 budget incorporates a small cash increase for universities in the year, compared to the 2024-25 allocation. However, Universities Scotland responded to the budget with a stark warning that the sector was in a “precarious state” as a result of public sector funding decisions over the last c.10 years, citing challenges that were “immensely difficult”. In real terms, the Scottish Parliament Information Centre (SPICe) reports the 2025-26 resource allocation for universities to be a decrease of c.0.68%. Whilst an additional £15 million of funding to the Scottish Funding Council for distribution to universities in need of financial support was confirmed when the budget was passed in late February 2025, it is not enough to provide financial security to those institutions currently experiencing the greatest financial stress.
While the universities do charge a token annual tuition charge to those students of £1,820 per year, this is in fact funded by the Student Awards Agency Scotland (SAAS), generating funding in the 2022-23 year for Scottish universities of c.£200 million. Institutions received a further c.£700 million in the 2022-23 and 2023-24 years via the Scottish Funding Council (SFC), the Scottish Government’s distribution vehicle for university funding, which undertakes the role performed by the Office for Students in England (OfS).
The tuition fee quantum of £1,820 per student annually has remained since the 2009-10 academic year, and the monies distributed via the SFC for the main teaching grant have incorporated below-inflation increases. The financial impact on universities in Scotland of this is reported as a c.19% drop in total direct public funding when the 2023-24 academic year is compared to the 2013-14 academic year.
Rising costs across the board erode margins
Inflationary and economic pressures on operating costs – including the costs of developing buildings and facilities, and increasing salaries and pension costs – have contributed to the overall financial strain and eroding gross margins.
The upcoming National Insurance (NIC) increases for employers creates further financial pressures on Scottish universities. The Scottish Government estimates this will result in a c.£45 million cost in 2025-26 for Scottish higher education institutes. Universities Scotland made an ask of the Scottish Government to revisit its 2025-26 budget in light of the UK Government NIC announcement. It cited the allowance for English universities to increase tuition fees in 2025-26 as a means to cover the corresponding NIC obligation falling on their English higher education counterparts. The Scottish Government is facing its own cash constraints as to 2025-26 budget allocation, however, and can't meet all asks of it from every sector.
Universities have implemented cost-cutting measures, such as voluntary redundancy processes, course reductions and delaying investment in infrastructure, to mitigate these financial challenges. But management will be acutely aware that this must be balanced against the need to meet regulatory obligations and remain competitive in the global higher education landscape.
Financial deficits
As evidence of these challenges, a number of Scottish higher education institutions have reported financial deficits in their 2023-24 financial statements (which they are required to share publicly), against reported operating surpluses in prior years. Such annual losses are not sustainable, as without sufficient new funding sources, they will generate erosion of financial reserves and generate material risk as to the solvency of key institutions.
Of the accounts assessed, contributing factors to the deficits included:
- increased cost bases, which couldn't be fully passed on to students or funding providers
- a reduced number of eligible student applicants (against increased availability of places), leading to high intra-institution competition.
Other sector concerns
Universities have also raised concerns as to how to balance delivery of the Scottish Government’s strategic priority for the higher education sector of widening access with the current funding model. This model places caps on the number of Scottish students offered places each year in order to deliver the free tuition fee commitment.
How we can support universities
The landscape for Scottish higher education providers is such that an increasing number of providers will need to make a substantial change to their funding model in the near future to avoid facing material risk of closure. There's no guarantee that emergency funding asks of the Scottish Government or other potential funders will be met to avoid an insolvency event.
The OfS’s guidance that proactive financial and strategic intervention is critical is just as applicable to Scottish institutions. This isn't always easy for management teams in academia, however. Many have seen significant personnel changes in recent years and face internal bandwidth constraints from existing challenges to recruitment as part of existing cost-saving measures put in place.
It's important that universities develop robust and realistic financial plans that incorporate granular stress testing and contingency planning, and maintain these as live documents.
Universities: Navigating the financial challenges
For more insight and guidance, get in touch with Stuart Preston or Claire Martin.
