I just started getting this weird glowing fog around NPCs, as far as I know I have not changed anything with the game, no mods etc... everyone just started glowing... any ideas?

Only NPCs, or creatures too? Sounds like item enchanted with detect life spell.

Thank you so much for your response! It's on creatures too so it sounds like you are right - now for the big question... can I get rid of it?

Nevermind, I found the item and took it off - thanks again for your quick reply.

Check all of the clothing items you have equipped and see if any of them have a detect life enchantment on them and if they do remove that item !