Will Carefully Crafted Health And Social Care Levy Proposals Defeat Objections?

George Bull, a senior tax partner at audit, tax and consulting firm RSM.
A briefing paper published by the House of Commons Library in December 2020 lays bare the financial crisis in adult social care funding in England. Between 2010/11 and 2015/16, expenditure on adult social care fell in real terms, resulting in hardship and misery for an estimated 1.5 million older people whose needs were not met. Between 2016/17 and 2020/21 a series of ad hoc steps were taken by the government to increase real terms expenditure. While these provided a measure of relief, they did little more than kick the can down the road. A long-term solution to the financing of the social care system in England is urgently needed. This was promised by the Prime Minister as long ago as July 2019.

Now, with temporary fixes exhausted, spending pressures have reached a crescendo. Only 2% of social care directors are confident of being able to meet their statutory duties in 2021/22 (section 2.6 of briefing paper).

Against this background the Government has today published proposals to help the NHS recover from the pandemic, to improve social care and to better integrate NHS treatment and social care. It appears that the NHS will be the first to benefit, with some social care changes not implemented until October 2023.

Who will pay for this?

Despite his populist tendencies, the Prime Minister is proposing a new Health and Social Care Levy based on a 1.25% increase in NI contribution rates. From April 2022 this increase will apply to employees, employers and the self-employed. From April 2023, once HMRC systems have been updated, the 1.25% levy will be formally separated out and will also apply to individuals working after state pension age. NI contribution rates will then return to their 2021/22 levels.

The Government has endeavoured to address criticisms that NI contribution increases are not progressive by pointing out that the highest-earning 14% will pay around half the revenues. By contrast a typical basic rate taxpayer earning £24,100 will contribute less than £4 per week in 2022/23. Smaller employers and 6.2 million people earning less than the lower profits limit will pay no more than they do now.

Mindful of criticisms that people who do not work should also contribute, the new Health and Social Care Levy has a second element. With effect from April 2022, the rates of dividend tax will also increase by 1.25%. Additional and higher rate taxpayers are expected to contribute more than 70%of the revenue from this increase.

To address concerns that the new Health and Social Care Levy could result in residents of Northern Ireland, Scotland and Wales paying extra taxes while receiving no additional funding, the government intends that each year Scotland, Wales and Northern Ireland will together benefit from an additional £2.2bn. That’s around 15% more than the additional taxes which will be paid by their residents, leading the Prime Minister to proclaim that there will be an average ‘Union dividend’ of around £300m every year.

As a frim we have looked in more detail at the significant shortcomings of using increased NI contributions to fund social care. We also proposed a separate social care levy on earners between the ages of 40 and 60, when individuals’ earnings are likely to be at their peak. This tax would be ring-fenced for this purpose and would not be available to fund political dilemmas of the day, as may be the case with NI contributions.

However, it’s important to keep an open mind on how a government might react. Knowing that the Prime Minister tries to avoid tough decisions which will make him unpopular, we therefore conducted a quick, informal survey.

On August 24, we asked people which taxes they would be prepared to pay to improve social care. Here are the results:

Prepared to pay a dedicated levy for this - 23.3%
General tax increase - 50.0%
No tax increase - 26.7%

In my decades in taxes, I cannot remember a single issue where half of respondents volunteered that they would personally be prepared to pay more tax to fund a specific problem.

In our informal survey, we also asked people which taxes they would be prepared to pay to support the NHS. Here are the results:

Prepared to pay a dedicated levy for this - 29.7%
General tax increase - 43.2 %
No tax increase - 27.0%
Looking at these figures, it seems that a shrewd political calculation has been made.

In the immediate aftermath of the pandemic, the public may be more sympathetic to the idea of paying more for better social care and an improved NHS. That sympathy is likely to decline with the passage of time.

If manifesto promises not to increase rates of NI, VAT and income tax must be broken, now is the time to break them. By breaking promises quickly, the Government also gives itself three years to demonstrate that the combined package of social care improvements and enhanced NHS funding are working. With a general election due by 2024, this is no small consideration.

While nobody loves a tax, NI contributions are the least visible of all the taxes we pay. They also carry the historic connotation of being associated with health and pension benefits. As such, many people still regard them as a protected levy for the NHS and social benefits. The Prime Minister, therefore, may judge that people will be prepared to pay increased and ringfenced NI contributions with less protest and greater trust that the money cannot be used for other government purposes. Finally, by including increased dividend tax in the Levy, the proposals emphasise that those with most income pay most of the Levy.

The Prime Minister brought his speech to a close by commending his proposals to the House. Subsequent debates and votes will determine whether the new Health and Social Care Levy ever comes into force. Inevitably, changes will be required as the details become clearer. Nevertheless, as the proposals in their current form appear to tick most of the boxes, the Government’s Parliamentary majority will almost certainly propel the Levy onto the Statute Book.

https://www.rsmuk.com/