If you have seen or heard any news in recent days, you will be familiar with phrases such as ‘social care reform’ and ‘national insurance hike’. Following much speculation, Boris Johnson has announced Government plans for the overhaul of the social care system in England. There will also be significant funding allocated to the NHS so that the post-Covid backlog can be reduced. The reform will be paid for using a new increase to the rate of National Insurance and dividend tax. This increase is to be named the ‘health and social care levy’.
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With such changes, it can often be difficult to determine what they mean and how they affect you. This guide aims to clarify matters for you.
What is social care and why does it need reforming?
Social care is the term used to describe assistance that elderly and disabled people require to carry out day to day tasks. This may be washing, cooking, eating, or taking medication. Often such care is needed on a 24-hour basis and therefore the costs can be extremely high. As our population increases and we all live longer, the demand for social care is increasing rapidly.
For those that do not qualify for state support towards their social care, the financial impact can be devastating. Costs can rise to thousands of pounds per week in complex cases. This results in many people needing to sell their homes and drain all their financial resources in order to fund the care they require to survive.
Alongside the crippling costs of social care, there are staffing shortages too. Working conditions are challenging and it is estimated that average wages are often lower than some retail staff and cleaners.
How does the state fund social care currently?
Under the existing arrangements in England, individuals requiring social care are assessed to determine whether they are eligible for state support:
- Savings of less than £14,250 – receive full state funding and therefore not need to pay for any care.
- Savings between £14,250 and £23,250 – state funding partially provided.
- Savings of over £23,250 – no state funding provided.
Please note that currently there is no cap on total care costs over your lifetime. This means that someone paying £2,000 per week for 3 years will be required to pay £312,000 for their social care.
How would this change after the reform?
Following the proposals set out by Boris Johnson, the new system will come into effect in October 2023 and be as follows:
- Savings of less than £20,000 – receive full state funding and therefore not need to pay for any care
- Savings between £20,000 and £100,000 – state funding partially provided
- Savings over £100,000 – no state funding provided
Alongside these changes to the savings thresholds, a cap of £86,000 is being placed on the amount an individual must self-fund towards their social care costs. This is the maximum that someone can be forced to pay during their lifetime. After paying £86,000, all social care costs will be state funded. This will apply to those commencing care from October 2023 onwards.
How will all this be paid for?
These changes to state support for social care will come at a hefty price. Unfortunately, it is not as simple as the Government funding the reform without consequences for the working people.
Therefore, the Prime Minister has announced the below:
- In April 2022, National Insurance will increase by 1.25% – for both employees and employers
- The rate of tax paid on dividends will also increase by 1.25%
- From April 2023, this will be a separate tax known as the ‘health and social care levy’
- The health and social care levy will also be charged on adults above the state pension age – under current arrangements, national insurance is not paid by anyone over the state pension age
Estimates suggest that £36bn will be raised in the first 3 years of these measures, and this will be ringfenced to help clear the NHS backlog and to fund the social care reform.
How much more National Insurance (NI) will I be paying as an employee?
Both the existing and the new rates of National Insurance (NI) are shown below:
- Earnings under £9,568 – no NI is paid
- Earnings between £9,568 and £50,284 – NI rate of 12% – rising to 13.25% in April 2022
- Earnings over £50,284 – NI rate of 2% – rising to 3.25% in April 2022
The additional National Insurance due as a result of the increase will be:
- £130 extra per year on a £20,000 salary
- £255 extra per year on a £30,000 salary
- £505 extra per year on a £50,000 salary
- £880 extra per year on a £80,000 salary
- £1,130 extra a year on a £100,000 salary
How much more National Insurance (NI) will employers be paying?
For employers, the rate of National Insurance is currently 13.8%, rising to 15.05% in April 2022 following the recent announcement. This is due on employee salaries above £8,840.52.
The additional employer National Insurance due as a result of the increase will be:
- £140 extra per year on a £20,000 salary
- £265 extra per year on a £30,000 salary
- £515 extra per year on a £50,000 salary
- £890 extra per year on a £80,000 salary
- £1,140 extra a year on a £100,000 salary
How much more tax on dividends will I be paying?
Dividends payments come from owning shares in a company. This could be as a result of investments that you hold outside of an ISA or pension (as dividends are paid tax-free within these). If you run your own business, you may pay yourself using dividends, in which case this increase could have a large effect on you.
Both the existing and new rates of dividend tax are shown below. You also have a tax-free dividend allowance of £2,000 per year:
- Dividend income within personal allowance of £12,570 – no dividend tax is paid
- Dividend income within basic rate tax bracket of £12,571 to £50,270 – tax rate of 7.5% rising to 8.75% in April 2022
- Dividend income within higher rate tax bracket of £50,271 to £150,000 – tax rate of 32.5% rising to 33.75% in April 2022
- Dividend income within additional rate tax bracket of £150,001 or more – tax rate of 38.1% rising to 39.35% in April 2022
Please note that your dividend income is added to your other income and therefore you may pay tax at two different rates.
The additional dividend tax due as a result of the increase are shown below (assuming no personal allowance is available, and the full dividend allowance is available):
- £225 extra per year on dividend income of £20,000
- £350 extra per year on dividend income of £30,000
- £600 extra per year on dividend income of £50,000
- £975 extra per year on dividend income of £80,000
- £1,225 extra a year on dividend income of £100,000
How will the money be allocated?
When we experience tax increases, it is always good to know that our hard earned cash is being used in the way that the Government promises us it will be. The positive news from this particular tax rise, is that the additional funds raised will be ringfenced. This means that the money will go into a separate pot that can only be spent on the areas set out in the original plan.
The Health and Social Care Levy will raise approximately £12m per year. For the first three years, these funds will be given to the NHS to reduce the lasting impact of Covid on waiting times. The number of patients waiting for elective surgery across the UK is now at 5.5 million, and this could potentially rise to 13 million by the end of 2021 if no action is taken. In order to resolve this, more appointments are needed, more operations offered and more treatments must be made available. Overall, the capacity of the NHS will be increased to 110% of the pre-pandemic level. This will require 9 million extra scans, operations and treatments.
After reducing the backlog in the NHS, the funds will be used to transform social care in this country. There are harrowing statistics that clearly demonstrate that many NHS beds are taken up by those who should be in social care. However, they either simply can’t afford to go into care, or would rather be in hospital. This puts unprecedented additional pressure on hospitals during a time when they are already bursting at the seams. Much of the additional funding will be used to subsidise care for more people in the UK. Other areas of focus will be improving conditions for care staff, and increasing pay as well. Too many care workers face poor working conditions, and this has lead to a shortage of workers in the care industry. Furthermore, training and development will be given to those in the social care workforce, allowing more opportunities for progression. The long term aim is to have a larger and more skilled industry of workers so that the system is more robust to cope with our ageing population.
As the reality of the Covid borrowing begins to sink in, it is inevitable that we must start to pay more to reduce the size of the Government debt. Furthermore, the social care system has been in need of attention for some time. These changes will no doubt hit the pockets of working people hard, but many will also feel the benefits of the reform at some stage of their lives.
The general consensus is that these changes will not fix our social care system. This cannot be done overnight, but it is a step in the right direction and one that too many Governments have been afraid of doing. We can expect further amendments to the system as our population lives longer each year.
For more information, see the UK Government press release on National Insurance changes.
If you have any questions regarding this topic, or would like a free initial discussion with one of our advisers, please do not hesitate to get in touch.