The Government is to fund social care costs by raising National Insurance contributions and adding a ‘health and social care levy’ which could make being an employee, hiring staff and earning dividends more expensive.  So what are the changes, who is affected and what does it mean for your money?

MPs are due to vote today on plans announced by the Prime Minister which will see National Insurance Contributions rise by 1.25%.  In April 2023 this increase will be scrapped but the new health and social care levy will be introduced at 1.25%.  Pensioners who work after retirement age will also be subject to the charge, whereas previously they were exempt from paying National Insurance once they reached pension age.

The rise will affect not only employees and the self-employed but also be added to employers’ National Insurance Contributions, increasing the cost of hiring staff. The Institute for Fiscal Studies calculate that the combined NICs rate on employment income (including employer NICs) will rise from 22.7% to 24.6%. By contrast, because the self-employed don’t pay employers NICs, their rate rises will rise from 9% to 10.25%.

In addition, there will be a 1.25% rise in dividend tax, meaning basic rate taxpayers will pay 8.75% dividend tax, higher rate taxpayers will now pay 33.75% and top rate taxpayers will pay 39.35%.

Funding for care was also addressed by the government who propose that from October 2023 there is to be a cap of £86,000 on the amount that anyone in England will need to spend on personal care in their lifetime.  Anyone with assets of less than £20,000 will not have to use their savings or home to pay for care.  Those being cared for at home or those with a partner can also ignore that value of their home for means testing purposes.

Currently anyone with assets of more than £23,250 must pay for their care costs in full but those with assets of between £20,000 and £100,000 will get some means tested support.  However, the support is only for care and not accommodation costs.

The government say the proposals are needed in order to address the waiting list backlogs in the NHS caused by the pandemic and also to find a solution for funding social care.

However badly needed the money is, some see the moves as a tax on employment which might not be immediately visible in a strong labour market but in the long term could affect consumers and employees by pushing up the cost of goods and services and lowering wages.

Paul Johnson from the Institute for Fiscal Studies acknowledged the need to address social care funding and sees the proposals as “better than doing nothing”, but also said the moves continue “a trend… of the burden of tax being shifted towards earnings”. This means for example, a working-age person earning the average UK wage of £28,388 a year will now be paying 20% of their income in total on the three income taxes. A pensioner on the same income will be paying just 11% – almost half the rate.

Andrew from Arcus said;

“As ever with any proposed solution from our Boris, the devil is in the detail. For example, whilst he keeps emphasising that National Insurance is only increasing by 1.25% that glosses over what this actually means.

If an employee is paying 12% national insurance at the moment and their National Insurance goes up by 1.25% then their employee National Insurance Contribution has actually just increased by 10.42%. Furthermore, as many commentators have pointed out this amendment does mean that those in work paying National Insurance are funding a pensioner care provision gap for those who are no longer paying National Insurance.

But the issue for poor old Bojo is that he has to use an ‘oven ready’ mechanism as to consult and consider a new potentially fairer system could take years. Whichever solution he opts for is going to offend somebody.

But on the plus side at least it won’t cost us the £350million a week promised to the NHS when the current Government leadership campaigned to take us out of Europe”.