Boris Johnson’s Social Care Tax Gets the Big Things Wrong

(Bloomberg Opinion) -- As proud as the Brits are of the National Health Service, the U.K. has long struggled with care for the elderly.

The founding principle of the NHS was free health care from “cradle to grave.” Yet if an elderly person requires care in a residential nursing home, all of a sudden it is no longer free. Indeed, many are forced to sell their homes to pay for such services.

According to government figures quoted by the BBC, one in seven people face bills exceeding 100,000 pounds ($136,750) for this “social care,” which can eviscerate their lifetime savings. Despite the cost, however, care is increasingly being rationed and nursing homes are being squeezed by local authority funding cuts and sharply rising expenses. Many homes have already failed.

So Boris Johnson’s government is to be applauded for tackling the social care issue. As a temporary measure, it is increasing the National Insurance payroll tax by 1.25 percentage points from April next year. Then from April 2023 this increase will be rebranded as a separate “Health and Social Care Levy.” This will help meet shortfalls in NHS funding and over time fund new measures to cap the cost of social care. The idea is that the cap will prevent people from having to sell their homes when they need looking after.

Unfortunately, there are problems with both aspects of this approach. First, capping the cost of care to the patient fails to address the larger funding crisis; second, the regressive nature of the levy required to pay for the cap skews the benefit largely toward the richer among us.

The issue with increasing National Insurance as a means of funding the social care cap is that, unlike ordinary income tax, the marginal NI rate actually decreases for higher earners. The NI rate on earnings between 9,568 pounds and 50,270 pounds is currently 12% and will rise to 13.25% next year with the increased levy. However, the NI rate on earnings beyond the higher threshold will only be 3.25%, even with the new levy. As a result, the marginal rate for someone earning 10,000 pounds a year will be four times greater than for someone earning 100,000 pounds or even 1,000,000 pounds.

There is a further skew as NI only applies to earned income. Richer people tend to have greater access to “unearned” sources of income, such as rent, pensions and investment returns. These are all exempt from the new levy. And when the Health and Social Care levy starts from 2023, that definition of earned income will also apply to less wealthy pensioners who have been forced to work beyond their pensionable age.

In addition to the increase in NI contributions, there will be a parallel increase in taxes on dividends. However, this is aimed more at the self-employed and contractors who operate as limited companies. Normal share dividends paid to the wealthy with substantial investments can easily be sheltered in tax-efficient savings vehicles such as pensions and Individual Savings Accounts.

Given that the burden falls disproportionately on those with low incomes and who run small businesses, it’s hard to imagine a more regressive form of taxation. However, the political attraction of increasing taxes in this manner is that it avoids a potentially even more unpopular increase in income tax. NI is also charged on employers, which effectively more than doubles the tax intake from any given increase.

For all this effort, though, even the cost cap is not as effective as you might imagine.

Under the new measures, lifetime social care costs are to be capped at 86,000 pounds. But this does not include the cost of food and accommodation, where the care home is a monopoly provider for a resident guest. So, even after 2023, the total cost will effectively remain uncapped and could still significantly exceed the government’s much vaunted new “limit.” Many people will still be forced to sell their homes to pay for their care. Only the wealthy will have anything left after sustaining such a financial hit.

To its credit, the U.K. has been one of the first developed economies to grasp the fiscal nettle and seek additional sources of revenue to make up for budget shortfalls, many of which predated the pandemic.

But in doing so the government has failed to acknowledge that wages have been steadily falling as a proportion of national income, as the share grabbed by corporate profits has been increasing. Even corporate profits pale beside the multi-decade appreciation in asset prices. Other countries faced with similar shortfalls are likely to seek more equitable solutions, almost certainly involving some form of asset taxation.

The U.K. has also rather missed the point of social care reform. The lack of funding for this essential service is the overarching issue — not ensuring that richer patients have something to leave their heirs. By funding this subsidy to the rich with a regressive tax on income, the government has given the wrong answer to the wrong question.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.

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