The Whitehall deal comes days after Clare Barclay, Microsoft’s UK chief executive, was appointed to lead the Government’s new Industrial Strategy Advisory Council.
Mr Nadella said the tie-up would ensure the “diffusion of tech happens not just in the private sector, but also across the public sector”.
Ms Barclay said the deal would help “transform public services and fuel the UK’s economic growth”.
Technology giants have promised AI will help boost jobs by cutting down on tedious tasks while freeing people up to more of the productive work that drives growth.
However, the latest innovations will reignite fears that bots could replace traditional office jobs, such as secretarial work or customer service roles.
In the 1950s, 1.5m women worked in secretarial roles in the UK, but the advent of personal computers put an end to typing pools and shorthand.
Today, around 1.5m people work in “administrative support services” – jobs likely to be transformed by the advent of AI bots.
One customer case study, cited by Microsoft in its announcement, claimed using Copilot was equivalent to hiring 187 full time staff.
Chatbots have increasingly been used by businesses to speed up email-writing, for presentations, customer interactions or technical functions such as coding.
However, the technology has also attracted scepticism, with AI bots known to make mistakes or occasionally invent information.
Marc Benioff, the chief executive of Salesforce, which competes with Microsoft, last week said its rival’s Copilot technology was “more like Clippy 2.0”, a reference to a rudimentary bot developed by Microsoft in the 1990s for Word.