Boris Johnson has announced a 1.25% National Insurance hike in an attempt to pay for the Government’s social care reforms and struggling NHS.
The new ‘Health and Social Care Levy’ is set to raise £12 billion a year over the next three years in what will be the “biggest catch-up programme in the NHS’ history.”
The tax increase will come into force in April 2022 and will be paid by all working adults, including those above state pension age who are currently exempt from National Insurance contributions.
The proposal has faced fierce opposition from MPs concerned that it breaks the Conservative Party’s flagship manifesto not to raise taxes, including National Insurance. However, Boris Johnson said the pandemic had placed the UK’s care system under “enormous strain” which it cannot be expected to recover from alone.
Tom Selby, head of retirement policy at AJ Bell, said: “The Government appears to have been spooked by the backlash over plans to increase National Insurance Contributions to fund its radical social care reforms.
“Those proposals would have loaded the costs on younger workers, sparking accusations of intergenerational unfairness.
“Instead, the Government has decided to badge up the tax increase as a 1.25% ‘Health and Social Care Levy’, with workers of all ages required to pay. Of course, the bulk of the working population are still under state pension age, meaning in reality this is a National Insurance hike in all but name and it is almost certainly still younger people who will pay the lion’s share of these costs.”
Those earning a base rate of £24,100 will pay an extra £180 over the course of a year, while those earning £67,100 will pay an additional £715 more a year. It is estimated that the highest earning 14% of people are expected to foot half the bill.
Selby warned that the move would likely prove unpopular with voters, with a recent poll showing less than one in six people supported an increase in NI to fund social care reform.
Shaun Moore, tax and financial planning expert at Quilter, said: “The Prime Minister has broken one manifesto promise to maintain another.
“Ringfencing the tax rise as part of a separate levy is in one sense a smart move as it provides more scrutiny over what the revenue raised is actually being used for and makes individuals more willing to cough up the cash. Plus, it ensures that businesses also contribute to the new health and social care levy.
“The announcement that those over state pension age will also pay the additional levy on earned income should help quell other intergenerational concerns.”
The Prime Minister said the proceeds from the tax increase would go towards helping the NHS clear its backlog created by Covid and pledged that by 2024/25, 30% more elective patients would be seen than before the pandemic.
Meanwhile, £5.3 billion will also go towards the social care system over the next three years.
From October 2023, the new threshold for the amount of assets a person has before they have to fully fund their own care will be set at £100,000. It is currently pegged at £23,250.
Those with assets of less than £20,000 will not have to pay anything for their care, while those with assets of between £20,000 and £100,000 will be means tested.
The Government will also introduce a cap on care costs of £86,000 over a person’s lifetime.
Selby said: “By using the proceeds to introduce a lifetime cap on social care costs set at £86,000, the Prime Minister will be hoping to limit people’s exposure to ‘catastrophic’ costs and encourage more insurers to enter the market.
“While voters may not thank him for this in the short-term, there is little doubt the UK’s creaking social care framework is in desperate need of reform.
“Although we await more details of how the plans will work, it’s worth noting previous proposals for a cost cap put forward by Andrew Dilnot did not include ‘hotel costs’ – such as food and accommodation – but rather the cost of the care itself.”
Alastair Black, head of industry change at abrdn welcomed greater clarity around how long-term social care will be funded.
“While the decision to press ahead with the National Insurance levy may not be popular with everyone, at least it gives us some certainty.
“There is no doubt this announcement is a good thing for advisers and their clients as a clear commitment to tax funding will give them confidence for the first time that long term care planning will become more straightforward with tax parameters and personal expectations clearly known. This will help conversations with clients with the future prospect of long term care becoming an integral part of a financial plan.”
Stephen Lowe, group communications director at Just Group, said almost six in 10 people (58%) aged 75 or older have been delaying making financial plans for care amid uncertainty over what the social care reform would entail.
Lowe said: “Today’s announcement is helpful for financial advisers and their clients. The detail needs to be examined but the fundamentals are at least now visible.
“A cap of £86,000 is only a start when considering the total costs people will be expected to bear because it excludes the ‘hotel’ costs – such as accommodation and food. It could easily take perhaps three or four years and perhaps £200,000 to £400,000 of associated spending to reach the cap. So financial planning to avoid catastrophic loss of assets will continue to be a valuable service provided by financial advisers.
“Seven in 10 of over 45s who have had to organise care for a family member said they found the care system very complex and were shocked at how expensive care is. After today’s announcement, financial advisers will have an increasingly important role to play in helping people make sense of the system and plan for the costs of later life care.”