Britain has struck a landmark pharmaceuticals pact with the United States that will see tariffs on UK-made medicines scrapped in return for higher prices for new drugs on the NHS, in one of the clearest trade-offs yet between industrial strategy and health service budgets.

Under the agreement, expected to be formally announced within days, Washington will impose a zero tariff on UK-origin pharmaceuticals, active ingredients and medical technology for at least three years. In exchange, the UK has committed to pay around 25% more for new innovative medicines, largely by relaxing the cost-effectiveness rules that determine which drugs the NHS will fund.

Officials say the deal secures a sector worth more than £5 billion a year in exports to the US, roughly a fifth of all British goods sold into that market. But the Office for Budget Responsibility has estimated that the changes to pricing and rebates will ultimately add about £3 billion a year to the NHS medicines bill, pushing the share of the health service’s budget spent on drugs from around 9.5% to about 12%.

On the US side, the agreement carves UK pharmaceuticals out of President Donald Trump’s sweeping tariff regime. The zero-tariff pledge covers existing and future sectoral duties imposed under Section 232 of the 1962 Trade Expansion Act and country-specific measures under Section 301, insulating British drugmakers from potential new rounds of protectionism that have unsettled global supply chains.

In Washington, the administration is presenting the pact as part of a broader push to force higher-income allies to shoulder more of the global cost of medicines. Trump and US health secretary Robert F Kennedy Jr have long argued that US patients effectively subsidise lower drug prices in Europe; officials say the UK’s commitments align with a “most favoured nation” strategy designed to narrow that gap without undermining industry profits.

In London, ministers are selling the package as a central plank of the government’s economic and life sciences strategy, building on the UK–US Economic Prosperity Deal agreed in May. Business and trade secretary Peter Kyle has argued the arrangements will give UK companies a distinct advantage in the world’s largest medicines market, while reinforcing Britain’s ambitions to be a global life-sciences hub.

The domestic price of that access will be felt through changes to the way the NHS assesses new drugs. From April 2026, subject to regulations, the National Institute for Health and Care Excellence (NICE) will raise its main cost-effectiveness threshold from £20,000–£30,000 per quality-adjusted life year (QALY) gained to £25,000–£35,000. A new “value set” for QALYs, which tends to attach a higher monetary value to health gains, will also be adopted.

NICE and ministers say the shift will mean a small but meaningful number of additional medicines – an estimated three to five each year – are recommended for use on the NHS where they would previously have been rejected on cost grounds. The higher thresholds will apply to all new drugs, not only US products, though the government acknowledges they were a core part of the negotiations with Washington.

At the same time, the UK has agreed to ease the controversial system of rebates that has pitted ministers against multinational drugmakers. Under the current voluntary and statutory schemes, companies have been required to hand back more than 20% of their NHS sales, with rates in some routes approaching a third of revenue – far above the 5–10% typical in other European markets. Industry groups have branded the UK “uninvestable” as a result.

From 2026, headline payment rates under the voluntary VPAG scheme are due to fall to 15%, which officials say will create a more “stable and predictable” environment for research and manufacturing. The Association of the British Pharmaceutical Industry has cautiously welcomed the direction of travel, while stressing that the detail of implementation will determine whether investment actually follows.

Ministers are keen to point to early signals. Bristol Myers Squibb has said it expects to invest upwards of $500 million in the UK over five years, directly linking its plans to the new framework for innovative medicines. Other global players such as AstraZeneca and Merck, which have paused or cancelled projects in Britain in recent years, are being urged to reconsider.

The political optics are more fraught. Successive UK governments have insisted that “the NHS is not for sale” and that health service drug prices would not be on the table in trade talks with the US. While the Starmer government maintains that the NHS remains publicly owned and free at the point of use, critics argue that tying NICE thresholds and rebate rates to a bilateral deal amounts, in substance, to negotiating what the health service pays.

Opposition parties, including the Liberal Democrats, and some NHS leaders warn that committing to spend more on medicines without a clear long-term funding plan risks squeezing already stretched budgets for staff, elective recovery and mental health. Devolved administrations, which run their own health systems but rely on UK-wide pricing frameworks, are also expected to scrutinise the implications.

For now, the government is betting that cheaper access to the US market and a friendlier climate for pharma investment will pay off in growth, jobs and faster access to cutting-edge treatments for patients. Over the next year, attention will turn to whether NICE’s new rules change real-world decisions, whether rebate cuts unlock the promised factories and labs – and whether the NHS can absorb a larger drugs bill without further strain.