Raising tax and paying social care fees

There is a lot of politics on which I could comment but in the spirit of political neutrality I will try to avoid that and just comment as objectively as possible.

Whatever you think about tax and big state, the fact is that the care system in this country is chaotic, unfair and underfunded. If as a country, we want the state to assist with Social Care then we have to pay for it, and it is down to the politicians to find a way to raise the money. Broadly speaking there were probably two solutions, the first was to raise money by tax, the second would be to do for a compulsory social insurance system similar to that used in some European countries. The government has chosen the tax route. This author earlier this year predicted in an article relating to the financing of Coronavirus that increasing the taxation of Dividends and tinkering with National Insurance were both routes that might be attractive. This is the route that the government has chosen to follow.

Looking firstly at the increase of 1.25% to the tax on Dividends. This was a smaller increase that this writer had expected and leaves him fearful that there could be further increases. Many of us who hold investments paying dividends, hold them in tax free wrappers such as pensions and ISAs and therefore will not be affected by this. It is only those who are sufficiently wealthy to hold substantial investments outside these wrappers who will pay this tax. From the perspective of your tax planning this reinforces the advice previously given which is to make sure you maximise your ISA and pension contributions.

Turning to National Insurance initially this will affect anyone liable to National Insurance and it seems this may mean that those over retirement age who do not at present pay National Insurance will continue to escape payment. Going forward there is to be a separate 1.25% Health & Social Care Levy which will be paid by all employees irrespective of their age meaning that pensioners who are earning will start to contribute to the cost of care. The self-employed will also pay this.

On top of this employers will also find themselves paying extra contributions meaning that the cost of employing someone will increase to nearly 15%, if your employer is also paying into a pension scheme it is likely that the cost of employing someone is probably in the region of 20% of their salary. This does make the writer wonder if this could put more pressure on employers, those with long memories may recollect that the Labour Government of Tony Blair and George Brown quietly raised National Insurance by 1% and that did cause some issues over employment at the time.

The other arm of the financing of Social Care is the dropping, we are told for one year only, of the State Pension Triple lock. This seems logical and there are many who would argue that the Triple Lock grossly favoured the retired at the cost of a younger generation and it is tempting to think that some politician might quietly suspend the Triple lock on a permanent basis.

Will all of this provide enough funding for Social Care? The suspicion in many circles is that it will not and that further tax increases will be required. The promise is that people will no longer pay more than £86,000 in care costs. But, how will this cap be calculated? As always the answer in not yet clear and unlikely to be straightforward.

Firstly anyone needing care will have to fund their food and certain living costs, it has been suggested that the contribution to these costs would be set on a scale, perhaps something like £1000 a month.

Secondly there is also further suspicion that the cap will be based on some sort of scale charge. To try and explain this imagine that you have an auntie called Mrs Palmer who is paying £1400 a week for residential care. It may be that in order to calculate the cap it will be assumed that she is paying some sort of scale fee, say £750 a week. If this is true then for Mrs Palmer paying £1400 a week the effective cap will not be £80,000 but £148,000 and it would be two years before any assistance came in. A further question is whether Mrs Palmer having reached the cap will get her future fees paid at the rate of £1400 a week or at the scale rate of £750 a week and if the later will she have to pay the extra or will she have to move to another cheaper care facility.

It seems fairly clear that there are still a number of things that need to be clarified, but the cynic in me suspects that further tax rises seem likely and that while the cap will undoubtably be a great assistance to many people it is quite likely that it will not solve all the problems of the Social Care system.

How can we help?

If you need further advice on the issues raised in this article, please do contact our Private Wealth & Inheritance solicitors using the contact form below, or email at HCprivateclient@herrington-carmichael.com, or phone 01276 868 222.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.

Charlotte Drury-Woods
Partner, Head of Private Wealth & Inheritance
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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