Johnson’s Tax Hike May Cement U.K. Generational Inequality

Prime Minister Boris Johnson’s plan to fund the National Health Service and social care uses a tax that has long attracted criticism for perpetuating generational inequalities in the U.K.

The 12 billion-pound ($17 billion) annual tax hike to help fund health care comes almost entirely from a 1.25% increase in National Insurance -- a tax paid on workers’ salaries.

That means that people with income from other sources, such as landlords or pensioners, will pay no extra tax. And since those people are often older and wealthier, Johnson’s policy is likely to dump more of the extra costs of funding care for the elderly onto younger and poorer workers. 

While Chancellor of the Exchequer Rishi Sunak said that top earners will shoulder most of the burden, others said they will hurt low earners who are already facing a cut in benefits from next month. 

Around 2.5 million households will be hit by both the tax increase and the looming reduction in Universal Credit, according to Sarah Arnold of the New Economics Foundation, seeing them lose out on 1290 pounds a year.

That’s “not a progressive solution,” she said on Twitter.

Other tweaks to social care could prove proportionally more painful for those with a lower level of wealth. 

The new plan includes a cap on lifetime care costs of 86,000 pounds for those with assets, including property of more than 100,000 pounds. That will mean those with higher-value houses will tend to spend a lower proportion of their wealth on care.

The government took some steps to make the hike on Tuesday more fair -- widening it to cover earnings from working pensioners and those derived from dividends - both of which have previously been excluded from National Insurance contributions. 

But that’s still something of a fig leaf -- just 600 million pounds, or 5% of the annual total, will come from the tax on dividends, according to government estimates.

©2021 Bloomberg L.P.

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