It took a pandemic to sort out care funding. At least that’s what the Government will be hoping that’s how the public will view it, rather than a couple of broken promises on the Triple Lock and raising National Insurance Contributions (NICs).
The Prime Minister said: “You can’t fix the Covid backlogs, without giving the NHS the money it needs. And you can’t fix the NHS, without fixing social care.”
Others feel differently. The Institute for Fiscal Studies says it will “raise the tax burden in the UK to the highest-ever sustained level.”
As ever, the devil really will be in the details of these announcements. Mr Johnson was typically high-level in his delivery, leaving his ministers to unravel the intricacies for everyone else. The devolved administrations also set their own policies and they have yet to be outlined, although in a letter to them today, the Prime Minister estimated it would generate around £300m a year for them.
As financial advisers, it leaves a lot for us to unpick.
People are going to pay 1.25 percentage points more – so going up from 12% to 13.25% – and businesses will need to do the same for their employees as NICs are payable by both parties. A move that would have been more controversial had the PM not extended the increase to those still in work who are above the retirement age. Apparently, this was not in the original proposal (which seems a bit tone deaf) but it will still mean it is the largest personal tax rise in decades. Those earning over £67,100 will pay £715 more a year in national insurance from April 2022. Basic rate taxpayers will pay an extra £180 a year.[i]
The concern for everyone in the financial advice industry is that this hit to pay packets will start to reverse some of the good behaviour we had seen among people saving for retirement. Some might look at their pension contributions as a way of paying for the cost of living. If we are about to experience some economic turbulence with the end of the Furlough scheme, the timing could be bad.
Triple Lock earnings suspension
Given the quirks of the last 18 months, which had blown the usual measure of wage inflation up to 8%, it would have been highly contentious to increase the State Pension by the same amount. The only real source of speculation was which measure the Chancellor was going to use to justify his decision. In the end, a suspension for a year and an increase of 2.5% is probably an equitable outcome for all. It’s fair to say that’s a pretty standard increase, given that this is guaranteed component of the Triple Lock and our projections will be largely unaffected.
Dividends tax increase
There will be an additional tax of 1.25 per cent on dividends from shareholdings. This is to ensure that those people who generate their income from investments rather than work will pay the same rate. Dividend taxpayers are more likely to be high-earners as well, with over 70% coming from higher rate or additional rate tax payers.
Pension and ISA wrappers will be exempt from the tax, which means many of our clients will see the bulk of their assets protected. However, those who do generate a lot of their income from investments will want to look at the impact of the rise on their income projections and our advisers can assist with a strategy revision.
Social care costs
Anyone with assets under £20,000 will not have to pay towards their care. The cost for those with more than this will be tapered, with anyone in England who has assets of more than £100,000 paying for the full cost of their care per year until they hit the £86,000 cap. This is calculated to be roughly three years’ worth of care costs, so the Government is taking on a substantial liability. Again, the detail is yet to be outlined in Scotland, Wales and Northern Ireland.
The burden on local authorities to administer the cap will be substantial; it was for this reason alone the cap was abandoned before it even started back in 2014.
The real value for the taxpayer is likely to arise in the quality of care provided. Currently, around 1 in 3 posts in the industry are vacant and it is notoriously poorly paid work that relied on an influx of migrant workers to fill. It has been well-documented that Brexit and the Covid pandemic has reduced the availability of such labour.
So, on paper the cap on costs looks attractive, whether the standard of care will be sufficient is another question. It’s likely that those with the means will want to pay more for a higher standard of care.
What is covered and what is not covered is also a bone of contention here. Some care will be eligible for NHS Continuing Health Care, which is free at the point of delivery in any event. However, being diagnosed with most forms of Dementia does not automatically make you eligible for free care, despite being a considerable burden on carers and sometimes requiring round the clock care.
It’s certainly a long way from a one-size fits all solution and planning for later life care is an important and ongoing discussion between advisers and clients as part of the Estate Planning process. Today’s announcements add some clarity, but by no means do they remove uncertainty from the situation.
Britons have not historically taken well to tax rises, especially those that go against a manifesto promise. Given the Government’s support for some aspects of the economy, like the Stamp Duty holiday and extending the Furlough scheme several times, the timing of these measures will stick in the throat for those who viewed them as unnecessary.
It’s hard to find someone who doesn’t want our health and care services to be improved – and the Covid pandemic has really highlighted the value of these services – but there will be knock-on impacts in areas that the Government has decided are not so important.