Advisers and financial services experts say that the increase National Insurance (NI) tax provides some clarity on social care and NHS issues, but will increase financial vulnerability, especially for younger workers.
Prime Minister Boris Johnson’s plans to increase NI payments by 1.25% from April next year were laid out in full yesterday (7 September) during an address to the House of Commons.
In order to raise a desired total of £36bn in funds to address longstanding issues in the social care sector and the strain put on the NHS by the Covid-19 pandemic, the “health and social care levy” will affect all those earning over £9,678 per year and will include people over the state pension age that are still in work.
Alistair Black, head of industry change at abrdn, said that while the decision to increase NI tax will not be a popular one, it does provide an element of 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,” said Black.
“This will help conversations with clients with the future prospect of long-term care becoming an integral part of a financial plan.”
Also welcoming “the UK government’s clear determination to provide certainty and clarity” was the Huw Evans, director general of the Association of British Insurers: “Under the current system, people don’t always plan for future care costs, causing financial hardship for families at a time when they are already distressed about needing care for a loved one or themselves.”
“The simpler and clearer the rules about what the state will provide, the easier it will be for insurers to respond to and support customers with what is not covered. Today’s announcement is a welcome step forward.”
The director of the Centre for Policy Studies, Robert Colville, said that Government should be applauded for “having the courage to grasp the nettle” on the issue of social care funding.
“There are no perfect options here – but that said, it is disappointing that ministers have chosen to stick with the Dilnot model, which entrenches housing inequalities, rather than the state pension model proposed by the CPS and Damian Green MP,” he said.
However, Colville also said that the 1.25% raise in NI contributions will be a bitter pill to swallow: “We know social care is in dire need of reform, but raising employee NICs will immediately reduce take-home pay, at a time when pandemic-related inflation is just starting to take off. Increasing employer NICs will hit workers too, by holding back wage growth.’
Broken promise
While the Prime Minister acknowledged in an address to the House of Commons that the increase to NI tax represents a broken manifesto promise, Shaun Moore, tax and financial planning expert at Quilter, stated that the PM had only “broken one promise to maintain another.”
“The triple tax promise not to raise the rates of national insurance, income tax or VAT has been sacrificed to help fill the fiscal black hole and plug the cost of NHS cases caused by the pandemic, and then to pay for social care reforms after three years,” said Moore.
“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.
“While the young will still face a rise in national insurance, it has been decided that dividends is the way forward and one method of taxing wealth on the older generations.”
Concern over the financial impact that funding social and health care reform will place on the younger generations was also highlighted by Steven Cameron, pensions director at Aegon.
“The government’s plans to increase employer and employee NI by 1.25% to pay for the state’s share will no doubt continue to prove controversial, with accusations of younger often lower-paid workers paying a disproportionate share of the costs of care for today’s elderly, many of whom seem comparatively wealthy,” said Cameron.
“Choosing to collect the extra funding through NI rather than income tax may make sense for the NHS boost but for social care looks more like spin. But using NI as the collection mechanism ensures businesses also contribute.
“Extending the additional care premium to those with earnings above state pension age removes what would otherwise have been a glaring generational inequity.”
Tom Selby, head of retirement policy at AJ Bell, said that by branding the increase as levy on health and social care, the government has attempted to sidestep placing the costs squarely on younger workers and incurring “accusations of intergenerational unfairness.”
“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,” said Selby.
“This is likely to prove unpopular with voters, with less than 1 in 6 (15%) of people questioned yesterday saying they’d support an increase in National Insurance to fund social care reform.”
Social reform
The move to address the funding crisis that has beset the social care sector was almost unanimously welcomed by the financial services sector, although there was also an acknowledgement that the Prime Minister’s plans will not be enough on their own.
“We believe that the proposals put forward today merit some further consideration; the more generous means-test and cap on the amount people will have to contribute to their own care in old age are both welcome, said Tim Fassam, director of government relations and policy at PIFMA.
“However, the care system remains highly complex and may still lead to significant costs for individuals.
“Obviously, no proposal put forward will be perfect. Most people are reluctant to think about the final stages of their life and therefore put off planning for it. But the need to plan for social care is increasingly an issue that financial advisers and wealth managers are helping existing and new clients with and those that receive advice early are likely to find they are more comfortable in later life.”
Anne-Marie Perry, founder of care provider, CareMatch, said that the social care was more an issue of morale rather than funding.
“The government recognises that the UK care sector isn’t working as well as it should be. Although extra funding is welcome this alone will not address the most important issues the industry faces. Money can’t fix the chronic shortage of carers or the low morale of a workforce in the frontline of the pandemic,” Perry said.
“To tackle the lack of carers and put the care sector on a sustainable footing, we need to reshape the industry to make it an attractive career. In light of the UK’s ageing demographics, its vital that we invest now in more tools, resources and systems to do this and to support carers and those they care for. We need solutions that provide more flexibility and prioritise the welfare of everyone in the industry.”