diff --git a/app/main/views/service_settings.py b/app/main/views/service_settings.py
index 1af8ed6dd..7b42732c3 100644
--- a/app/main/views/service_settings.py
+++ b/app/main/views/service_settings.py
@@ -1,5 +1,6 @@
 from flask import (
     abort,
+    current_app,
     flash,
     redirect,
     render_template,
@@ -695,10 +696,15 @@ def set_organisation_type(service_id):
     form = OrganisationTypeForm(organisation_type=current_service.get('organisation_type'))
 
     if form.validate_on_submit():
+        free_sms_fragment_limit = current_app.config['DEFAULT_FREE_SMS_FRAGMENT_LIMITS'].get(
+            form.organisation_type.data)
+
         service_api_client.update_service(
             service_id,
             organisation_type=form.organisation_type.data,
         )
+        billing_api_client.create_or_update_free_sms_fragment_limit(service_id, free_sms_fragment_limit)
+
         return redirect(url_for('.service_settings', service_id=service_id))
 
     return render_template(
diff --git a/tests/app/main/views/test_service_settings.py b/tests/app/main/views/test_service_settings.py
index 8b5b11211..65ddb912c 100644
--- a/tests/app/main/views/test_service_settings.py
+++ b/tests/app/main/views/test_service_settings.py
@@ -1550,16 +1550,18 @@ def test_should_show_page_to_set_organisation_type(
         assert normalize_spaces(labels[index].text) == expected
 
 
-@pytest.mark.parametrize('organisation_type', [
-    'central',
-    'local',
-    'nhs',
-    pytest.mark.xfail('private sector'),
+@pytest.mark.parametrize('organisation_type, free_allowance', [
+    ('central', 250000),
+    ('local', 25000),
+    ('nhs', 25000),
+    pytest.mark.xfail(('private sector', 1000))
 ])
 def test_should_set_organisation_type(
     logged_in_platform_admin_client,
     mock_update_service,
     organisation_type,
+    free_allowance,
+    mock_create_or_update_free_sms_fragment_limit
 ):
     response = logged_in_platform_admin_client.post(
         url_for(
@@ -1578,6 +1580,7 @@ def test_should_set_organisation_type(
         SERVICE_ONE_ID,
         organisation_type=organisation_type,
     )
+    mock_create_or_update_free_sms_fragment_limit.assert_called_once_with(SERVICE_ONE_ID, free_allowance)
 
 
 def test_should_show_page_to_set_sms_allowance(