In September, Chancellor Rishi Sunak announced that, from April 2022, the Government will introduce a new UK wide 1.25% social care levy. This will tax earnings for employees, the self-employed and employers, in order to supposedly generate cash for the Government to invest back into the health and social care sector. Sunak stated that: “This significant £12bn-a-year long-term increase in public spending will improve people’s lives across the UK – but our health and social care systems cannot be rebuilt without difficult decisions.” Critics debate whether this tax hike is necessary – money is needed to tackle the social care crisis, but is this means of raising revenue regressive and punitive?
Supporters of the levy say it is clear that the NHS needs significant reinvestment in order to fix the backlog within the social care system, and the investment will allow an increase in hospital capacity as well as the NHS with space for nine million more appointments and operations to take place.
Furthermore, the rise in National Insurance (NI) will allow the Government to raise significant sums in a generally progressive manner and with relative ease. The Chancellor has said of the tax “It is fair: the more you earn, the more you pay”, which is generally the case if you exclude how the highest earners are treated.
Currently, all earnings between £9,568 and £50,270 are taxed at 12%, whereas any earnings over £50,000 are currently taxed at a rate of 2%. Therefore, higher earners are paying proportionally less of their income in NI tax. National Insurance only operates based on the income of the individual and can be calculated in a straightforward manner for each salary payment, without the need to adjust for other externalities such as asset ownership.
However, the social care levy is regressive and unfairly burdensome for certain groups – young people as well as lower earners will be disproportionately hit in comparison to those who have reached the state pension age of 66. This is because those who have reached the state pension age are no longer asked to contribute towards NI and would not be paying anything towards this social care reform that would, crucially, be of most benefit to them.
Those who hold assets would also be unaffected by the NI tax hike when compared to those in employment, as NI is an income based tax. Therefore, those working to raise funds for a house deposit are being held back in comparison with those who are already homeowners, ultimately leading to greater disparity between those on the property ladder and those trying to get on it.
The employed are also being hit harder by the NI rise in comparison to the self-employed. The self-employed already have an existing reduced rate in NI of 9% (compared to current employer NI of 12%). Additionally, the self-employed will avoid paying employer NI as there is currently no equivalent for the self-employed.
With the problems with a rise in NI clear, the Government should consider alternatives.
First, the Government should look back at previous eras of high economic growth presided over by Conservative governments – particularly where the Government provided greater freedoms to both the firm and the individual via fiscal policy that stimulates economic activity, while helping to promote wealth for all. For example, by lowering corporation tax.
Under Chancellor George Osborne, cuts were made over a six year period (2010-16) from 28% to 19%, resulting in the Government’s corporation tax revenue climbing from £31 billion to £47 billion over six years. If the Government decided to lower corporation tax from the current 19% to a more desirable 15% rate for businesses, the UK could attract business investment nationally both from domestic as well as foreign industries, potentially leading to huge increases in tax revenue. This solution would not only provide revenue for the Government to invest into the social care system. It could also give the economy much needed stimulation post-Covid.
Another alternative to hiking NI to fund social care is for the Government to explore zero rating the entire care industry. Zero rating would mean that the care industry could reclaim the tax on everything they purchase as well as recover the VAT on their costs and overheads. Although care homes are currently exempt from VAT, they are not zero rated.
By zero rating the care industry, costs across the whole sector would be reduced because of the saved revenue that is spent through VAT, including costs associated with daily living such as food and energy bills. Money saved could help care homes offer more affordable care plans for those who need it, or at least help ease the financial pressure for social care providers. This is not currently covered in the £86,000 care cap. This care cap within the social care reform means that individuals will not need to spend more than £86,000 on their personal care over their lifetime. However, costs such as accomodation and meals are not included, and will obviously still need to be paid for.
Overall, the current reform proposed by the Government, although not perfect, will ensure that care can be provided to those that require it. However, the method of raising the required level of funds should be reconsidered. Alternative methods which raise the required revenue for social care reform must be explored to increase funding for social care and provide benefits for wider society through the rewards of economic growth.
Tom is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Number 10]
