Is a NI hike the solution to LTC costs?

4 September 2021

The UK Government is planning to hike national insurance to fund the social care reform and NHS, media reports have suggested.

According to reports, health secretary Sajid Javid is proposing an increase of between 1 and 2% in return for capping the amount an individual will need to spend on social care costs.

The move, which would affect around 25 million people, would  break a 2019 Conservative party Manifesto pledge not to raise rates of income tax, national insurance or VAT. It has been met with backlash from both Tory cabinet members and the opposition Labour party amid concerns it would hit low earners, young people and business.

Shaun Moore, tax and financial planning expert at Quilter, said: “Boris Johnson will be keen to tick social care off his to do list well before it becomes a contentious issue at the next general election. But he clearly hasn’t read the room since the plans were floated and then shelved in July. The Cabinet threatened a revolt then and they are making the same threat now given the regressive nature of a hike in national insurance.

“Those on lower incomes and the young will pay relatively more and those working over state pension age pay nothing at all. The optics of such a proposal are not great. The PM had the time to go back to the drawing board over the summer recess but decided to make no changes.”

According to Moore, the Prime Minister could have instead opted to increase income tax or remove the national insurance exemption for those above state pension age.

Moore said: “Removing the national insurance exemption won’t raise that much in the grand scheme of things but it would at least make it seem that everyone is in the same boat.”

Steven Cameron, pensions director at Aegon, said delivering a “fair and sustainable” social care funding deal remains one of society’s greatest challenges and requires careful consideration.

Cameron commented: “The Government needs to gain public support for a deal which is fair across wealth bands and generations.

“With costs often very high, individuals would ideally start planning well in advance potentially decades ahead of actually needing care. This means the deal has to be stable, if possible with cross-party support and the Government’s share needs to be backed up by sustainable and adequate funding which could well involve a new social care premium or increases in taxes or national insurance, each of which has pros and cons.”

According to Cameron, increasing national insurance would raise a question mark over fairness, with self-employed treated differently and those over state pension age exempt from paying the tax.

Cameron explained: “The older people are, the sooner they may benefit personally from the new deal, so there is an argument for levying increases initially only on those above a certain age.

“Governments of nations within the UK have devolved powers to make their own social care arrangements and to set income tax rates and bands, which also needed factoring in, adding another layer of complexity.”

Regardless of what the government announces, experts still advise individuals to think carefully about saving for their own care.

Moore said: “Personal provision for social care will make up the vast majority of how someone pays for the care they need and it certainly won’t be a small amount so people should think carefully about not only saving for retirement but also for social care.

“The movement on social care funding could well mean the end of the triple lock, for the next financial year at least. It becomes much harder to justify a near double digit increase in state pension income when you’re also levying increased tax on the working population – all because of an anomaly in the data.”

Cameron added: “Individuals also need incentives to do the right thing which is why those who do build up savings shouldn’t face unlimited personal contributions. We strongly support a cap on how much any individual will be asked to pay for care costs and clarity on any separate charges for ‘room and board.’

“Getting the level of the cap right and hence the sharing between the individual and general taxpayers will be a difficult balancing act and is key to making the deal sustainable long term.

“Increasingly, preparing for possible care costs will become part of managing pension, property and other savings wealth into and through retirement.”

Aegon has set out a 12 point blueprint which it believes should form part of such a deal.

The pension specialist is urging the government to devise a plan that enables everyone to have access to good quality care in later life, integrated with the NHS, and for costs to be shared fairly and transparently between the government and individuals based on their wealth, including whether it will include a person’s home, as well as greater transparency over how the government intends to fund its share.

In addition, any deal should provide a clear and understandable way of determining personal contribution with an overall cap, include tax incentives to encourage people to save in advance,  and be fair across generations and wealth bands.

Finally, Aegon says the government should provide adequate resources at local council level, putting an end to the current care lottery across regions, provide clarity on other ‘room and board’ costs to suit individual needs and consider increasing or scrapping the pension lifetime allowance to allow people to fund their normal retirement needs as well as care costs within their pension. It should also provide flexibility to reflect the devolved powers of different governments across the UK and have long-term stability with cross-party support.

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