The government has announced recently that they plan to reform the landscape of Health & Social Care, namely in order to support the NHS and help to reform the care sector. In order to do so, the Government will introduce a number of changes to income tax and National Insurance rates.
According to Downing Street, their proposal will raise an additional £12bn per year , ringfenced to tackle firstly the backlog in the NHS due to the pandemic and, subsequently, to fund wider health and social care costs.
Personal Care Fees
The care reform aims to assist those who pay personal care fees, mostly typical due to the effects of old age. From October 2023, there will be a cap on personal care fees of £86,000 over an individual’s lifetime. Anyone requiring personal care in excess of this amount will receive full support from the government.
Currently, individuals with financial assets of more than £23,500 are required to fully fund their own care costs. From October 2023, anyone with assets below £20,000 will not have to pay anything towards their own care and those with assets between £20,000 and £100,000 will be means tested so that those with less assets pay less towards their costs. Whilst full details have not been released, it sounds as though a ‘sliding scale’ approach will be adopted.
How will it be funded?
From 6 April 2022 (for the 2022-23 tax year) National Insurance Contributions* (NICs) rates will increase by 1.25%. This temporary change affects all taxpayers currently paying National Insurance. Therefore, it will not affect those employees and self-employed over State Pension Age (SPA) as this group does not currently pay NIC. For those below SPA, the first rate of NICs will be paid at 13.25% (up from 12%) and the second rate at 3.25% (currently 2%). The National Insurance paid by employers will also increase from 13.8% to 15.05%.
In addition, the income tax rate applicable to dividend income will be increased 1.25% to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
By way of example, the changes will cost £255 p.a. for an employed individual earning £30,000, and £505 p.a. for someone on £50,000.
From the 2023-24 tax year onwards, the National Insurance Contribution rates will return to their previous levels of 12% and 2%. The 1.25% will become a separate tax known as the “Health and Social Care Levy” (“HSCL”) – we apologise for the similarity to our own name!
As this will not be a part of the National Insurance system, the government are able to extend this levy to working individuals who are over state pension age. For those already paying the increased NICs in 2022-23, the change is in name only and individuals will not see any further increases in 2023-24 although they will notice the levy as a separate line on payslips from April 2023.
*Note this does not apply to Class 2 NICs, which is the fixed rate for self-employed individuals (currently £3.05 per week). The self-employed are; however, impacted as Class 4 contributions are subject to the rise.
Will this affect me?
Below is a non-exhaustive list of some of the scenarios where our clients could be affected:
- The self-employed and employees under state pension age during the tax year 2022-23 by way of NIC increase, then from tax year 2023-24 by the new “HSCL”;
- The self-employed and employees over state pension age from tax year 2023-24 due to the new “HSCL”;
- Owners of businesses, as employers, will pay higher Employers’ NICs for one tax year (2022-23);
- Owners of business will pay higher rates of income tax if they receive dividends
- Clients with General Investment Accounts (“GIAs”) whose dividend income exceeds the dividend allowance will also pay income tax at the increased rates
- Clients who are in care will see their care costs capped at £86,000 over their lifetime
Note that neither the increase to NICs nor the subsequent HSCL will affect pension income (be that private pension income, State Pension, drawdown etc), as these are subject only to income tax.
We expect the funding cap to be well received by clients. It’s a common concern discussed in initial and review meetings alike, that future care fees provide uncertainty in retirement. It’s common to hear the question “How much can I spend now to enjoy my retirement, when I may need to make provisions to pay for care in the future?” or “I’m concerned care fees will mean I’m unable to pass on what I want to pass on to my children and grandchildren”. Although £86,000 is still a significant sum of money, with average monthly residential care home costs standing at £2,816 in the UK. £86,000 equates to less than three years of residence.
Whilst the funding cap is likely to be well received, seldom are tax increases! That said, it’s difficult to see where else this money could be sourced considering the increase in Government debt as a result of the pandemic (currently 106% of GDP). This further highlights the appeal of taking full advantages of the tax breaks and allowances provided by Government, be that through tax allowances or product-based allowances such as ISA and Pensions.