Helen Kidd, Head of Charities and the Third Sector, highlights the increasing financial pressures facing Scottish charities and the growing role of mergers as a strategy for survival.
Increasing numbers of Scottish charities are on the verge of merging to secure their survival as financial pressures pile up. Rising operational costs, combined with falling funding sources, are forcing more organisations to rely heavily on cash reserves, prompting concerns about their long-term sustainability.
Such challenges mean that the prospect of mergers is now even greater than it was at the peak of the coronavirus pandemic, when income plummeted as major fundraising activities collapsed. Research suggests that as many as eight in ten Scottish charities are currently facing cash challenges.
Discussions around mergers are becoming increasingly common among charity leaders and boards as they navigate an exceptionally difficult environment.
Mergers are often a last resort for survival, sometimes in response to a financial shock or pressures arising from contracts and commissioning services. Funding uncertainty is affecting areas such as youth services and health and social care.
Rising wage and National Insurance costs, strains on grant-making funders, and pressure in the public sector are among the issues compounding the challenges charities face in delivering services. For some organisations, continuing to deliver services is becoming unsustainable.
The scale of the challenge
According to SCVO, the organisation which champions the roles of charities and their positive impact in Scottish society, the voluntary sector in Scotland employs 136,000 people - about 6% of the national workforce.
As employers, their National Insurance (NI) contributions rose to 15% on salaries above £5,000 from April 6, alongside businesses. That was up from 13.8% on salaries above £9,100 a year.
SCVO estimates that this has cost the sector in Scotland £78m and believes it is directly impacting recruitment and redundancies.
The UK National Living Wage for those aged 21 and over also increased to £12.21 per hour, up from £11.44.
While it’s too soon to fully understand the long-term impact of these increases, charities have far less flexibility to absorb them. Many leaders are having to make tough choices, not just about the immediate future, but about their organisation’s sustainability in the years ahead. In some cases, mergers may be the only viable route.
A sector under strain
The most recent Scottish third sector tracker compiled by SCVO found that 81% of organisations reported financial-related challenges, an increase of 10% since spring 2023. Furthermore, 70% said they expected a negative financial impact from increased employer NI contributions.
Commenting on these results, Anna Fowlie, SCVO’s Chief Executive, said:
“The voluntary sector is more fragile than it’s ever been, with costs rising, challenges in finding staff and volunteers and cash flow. Financial sustainability for charities, community organisations and social enterprises is a long-standing problem, but concerns over immediate cashflow have risen to the top over recent months.
“Change is inevitable, and not necessarily a bad thing. I would like to see organisations making decisions about mergers or other ways to secure their future based on the best interests of the people and causes they serve, rather than as a last-ditch crisis response.
“Our sector is a crucial part of the social and economic fabric of Scotland so its sustainability is in all our interests.”
More than half of respondents to SCVO’s tracker (54%) said their current use of reserve funding was unsustainable, up 14% since autumn 2024.
For many charities, the increasing reliance on reserves is placing their long-term survival at serious risk. Expectations of post-pandemic restructuring were high, but strong government support and funding at the time enabled many organisations to weather the storm. It is only now that the financial cracks are beginning to appear.
Beyond emergency responses
While mergers can often be an emergency response, they can also be part of a proactive strategy to expand services. Importantly, they are not the only option for increasing reach, reducing costs or managing financial challenges.
Options range from informal alliances on common activities, to contract-based alliances or partnerships, joint ventures, group structures or membership models with a parent charity at the top. In all cases, trustees must carry out detailed due diligence around governance, finance and employment law implications.
The charity sector is fundamentally collaborative, and charities of all kinds - albeit sometimes in crisis situations – are coming together to deal with issues head-on to ensure their beneficiaries are protected.
Mergers aren’t always the answer, but the charities that not only survive but thrive will be those prepared to ask themselves fundamental questions about who they are and what they’re trying to achieve.
08 September 2025
Adapted from an article first published in The Herald
