The Scottish government has promised to unilaterally lift the cap on public sector pay in the face of threats by nurses to go on strike. Nicola Sturgeon, Scotland’s first minister, said the devolved Holyrood government would abandon the UK-wide pay deal that has restricted annual pay rises for about 500,000 staff, including nurses and firefighters, to 1%.

Sturgeon has been under intense pressure to lift the cap from Labour, the Scottish Green party and trade union leaders. The pressure intensified during the election campaign when one nurse told the first minister she had been forced to use food banks because of her low pay.

Derek Mackay, the Scottish finance secretary, pledged to act after Conservative and Democratic Unionist MPs voted down a Labour motion, backed by the Scottish National party (SNP), to lift the pay cap across the UK on Wednesday. The vote followed contradictory signals that the UK government was considering abandoning the cap, later denied by Downing Street.

Apart from a slight change to nurses’ pay in Scotland introduced while Sturgeon was health secretary, the Scottish government has stuck to a UK-wide public sector cap of 1% introduced in 2013 after a two-year pay freeze following the banking crisis. The UK government had pledged to keep it in place until 2020.

The Royal College of Nursing warned before the election that its members were poised to ballot for strikes after estimating that pay had fallen 14% in real terms as a result of the cap. Scottish parliament researchers said the average nurse has been left £3,400 worse off.

Pressed by Labour and the Scottish Green leader, Patrick Harvie, to use devolved powers, Mackay told MSPs on Thursday that “the time is up” for the cap. He said the Scottish government would take inflation into account next year in its pay talks with public sector unions.

“The Scottish government will take into account inflation in the future pay policy,” he said. “Remember that what the Labour party proposed was basic-rate tax rises for the workers of Scotland, including public sector workers. We will take a reasonable approach that absolutely recognises that the time is up for the 1% pay cap. Not only will the SNP commit to that, but we will do it.”

It is unclear how much lifting the pay cap will cost, but the decision to abandon it will increase pressure on Mackay and Sturgeon during the Scottish government’s budget negotiations later this year.

The precise increase will depend on complex negotiations involving ministers and the unions, including teaching unions. Although teachers are not included in the 1% pay cap, their pay talks will influence final decisions.

Kezia Dugdale, the Scottish Labour leader, said: “Just 50 days ago, Nicola Sturgeon and her SNP MSPs shamefully voted against lifting the pay cap for our dedicated NHS staff. The U-turn by her government is welcome, as it is high time that our public sector workers get the pay rise they deserve.”

The change in strategy came as the Scottish government published new analysis showing that the Westminster government’s welfare reforms would lead to a fall in benefit payments in Scotland of £3.9bn by 2020-21. The analysis revealed that hundreds of thousands of people would lose all or most of their benefits under the changes.

Jeane Freeman, the Scottish social security minister, said that loss of income was in addition to real-terms cuts in Scotland’s Treasury grant of about £2.9bn between 2010 and 2019, and further cuts in following years.

Freeman said the analysis “presents the stark reality of the UK government’s austerity programme, which imposes unjust welfare cuts that not only continue to cause misery and push more people into poverty, but also directly affect local economies across Scotland and attract international criticism”.