The UK’s biggest education union is claiming a significant victory after the government bowed to pressure and agreed to fully fund a forthcoming pay increase for teachers in England in a sudden U-turn.

Members of the National Education Union (NEU) were due to vote in a ballot for strike action next month over the government’s recent pay offer which provided for a 3.5% increase from this month, with an additional 3% from next September.

While the offer was a significant improvement on initial proposals from the then education secretary, Bridget Phillipson, there was concern among teachers and unions that it was not fully funded and schools would have to find almost a third of the wage increases from existing budgets.

After weeks of negotiation over the summer with the NEU general secretary, Daniel Kebede, Phillipson’s successor, Lucy Powell, confirmed on Monday in a letter to the union that the entire pay offer would be fully funded, using funds from recent revaluations of the local government pension scheme.

Kebede said it was a “significant” step and would result in an estimated additional £500m of funding for schools this year, which otherwise would have been spent on the pay rise.

“Finally, we have a government that accepts the reality that any teacher pay award must be fully funded,” he said. “Plugging the £460m black hole in school budgets signals a welcome return to reality, and a message of hope for the entire school community.

“Schools have been running on empty for far too long. Leaders simply could not afford to fund the pay award as set out by the previous education secretary. The new administration has accepted that it is wrong to force schools to make cuts to education just to make ends meet.”

Although the NEU national executive is yet to decide on the fate of the national ballot, the government will be hoping its latest gesture will lift the threat of strike action and possible school closure across the country.

In a snap poll before the summer break, 97% of NEU members who participated said it was “unacceptable” that their school would have to find the funds to make up the 1.1% shortfall in government funding of the pay rise, and 89% were prepared to take strike action to ensure the teacher pay award was fully funded.

In her letter to Kebede, Powell said: “I understand you are concerned the funding available in 26-27 is insufficient to cover the costs of the recent pay award.

“I am therefore pleased to be able to update you that recent revaluations to the local government pension scheme will see a 4.9ppt reduction in employer contribution rates and deliver significant savings on schools’ pay bill for support staff.

“We can confirm this reduction in costs will not be clawed back and as such, we are confident that schools will be able to cover the costs of the teacher pay award, at a national level.”

She added: “Given the material change to the affordability position, I would ask that the NEU revisits its proposed ballot of members planned for October and moves away from strike action.”

The Department for Education has been contacted for comment.