Posted by jonathanfullarton - September 16, 2021 11:01 am
Social Care Reform: National Insurance increases
Government proposes a record £36bn investment for Social Care Reform
Warning: 1.25% rise to National Insurance contributions (NICs) and dividend tax rates
On Tuesday 7 September, Prime Minister Boris Johnson addressed Parliament with his plans to raise more revenue to support the NHS and social care. He announced a 1.25% increase to NICs, with effect from April 2022. It is anticipated that this first step towards health and social care reform will raise an additional £12bn of Treasury funds, to be ringfenced to pay for the NHS and social care.
What are the changes
From 1 April 2022, workers will see a temporary increase of 1.25% for class 1 (employee) and class 4 (self-employed) national insurance contributions (NICs). Meanwhile, employers will also see a 1.25% increase in class 1 secondary NICs. The 1.25% also applies to class 1A and class 1B NICs paid by employers.
This 1.25% rise will also apply to partners earning in excess of the class 1 primary threshold/class 4 lower profits limit, which is currently £9,568 for the year 2021/22.
Employers will also be subject to an additional 1.25% rise for employees earning in excess of the class 1 secondary threshold, currently £8,840. Existing reliefs and allowances from employer’s secondary class 1 NICs will apply to the increased rates. This includes the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans and new employees in freeports.
Those above State Pension Age are not impacted by the April 2022 changes.
Social Care Levy
From April 2023, the temporary NI increases will be legislated separately as a Social Care Levy and NIC rates will return to the previous 2021/22 levels. It is important to note that the levy will also apply to individuals above State Pension age with employment income or profits from self-employment above £9,568.
The levy will be administered by HMRC and collected through the current reporting and collection procedures for NICs – Pay As You Earn and Income Tax Self-Assessment.
The levy will ensure that funds are ringfenced for use for future health and social care.
Dividend Tax rates
The government also announced a 1.25% increase in dividend tax rates from April 2022 increasing rates to:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers and;
- 39.35% for additional rate taxpayers.
The £2,000 dividend allowance will however remain.
The government estimates that in the tax year 2022/23, 70% of this increase will be paid for by additional and higher rate threshold earners. This increase in dividend tax rates will be legislated for in the next Finance Bill.
What does this mean for employers?
HM Treasury have reviewed these changes and calculate that households with the highest 20% of incomes will contribute 40 times more than those households with incomes in the lowest 20% income bracket, with more than one-third of the overall tax raised coming from the top 10% of households. This however, does not include the impact of the increase to class 1 secondary NICs paid by employers. Businesses may react to this by adjusting wages, prices or profits.
Partner Leigh Jones says of these changes “In March 2020 when the pandemic hit, we saw the Treasury turn on the spending tap and it has been left running ever since. Much of this was needed to prop up businesses, protect the NHS and support individuals through the pandemic. We all knew at that point the Treasury could not really afford these actions, so it was inevitable at some point we would see the clawback begin. That time appears to be now.
All governments know that any tax rises will never be popular and there is never a good time to increase taxes. We know many businesses have bounced back, but many are still battling the fallout of Covid and Brexit and the staffing and supply issues that the combined has caused. Whether this was the right time to impose yet further tax rises on top of those already legislated for Companies from April 2023, will remain to be seen. This certainly highlights the importance more than ever to ensure your business is structured as tax efficiently as possible, for when the tax rises start to arrive”.
Social care cap
From October 2023, the government also plans to cap the amount individuals will pay towards their own personal care during their lifetime at £86,000 finally addressing the cap suggestion recommended in the 2011 report by the Dilnot Commission. In the government’s proposals, individuals with assets less than £20,000 (increased from £14,000) will not be required to make any contributions to care costs from either their savings or selling or releasing equity from their family home. Individuals with assets between £20,000 and £100.000 may be eligible for means-tested support.
This proposed cap on social care costs may not be the silver lining it initially appears, especially when considering the average costs of residential care in England, currently around £35,400 per annum and, in London and other areas of south-east England, which can easily exceed £65,000 per annum.
The proposed lifetime cap does not necessarily mean that financial assets will be protected for individuals needing care in the future or, indeed, that they may not need to sell their home to provide for their care in later life, as the government seems to be suggesting. Individuals needing residential care may yet pay thousands for their care, for two reasons:
- Under current rules, expected to continue, local authorities set a maximum amount they will pay towards such fees. These amounts are notoriously low, with care homes charging self-funding residents around 40% more to subsidise local authority-funded residents. It is these local authority rates that are likely to be the basis of what counts towards the lifetime cap. However, if an individual is unable to find a suitable care home with costs equal to the local authority contribution, or, if they opt for a more expensive option, the extra amount paid will not count towards the cap.
- In addition, the lifetime care cap will not cover daily living costs of food and accommodation, which are set out by care homes and may be more than a person living in their own home would normally spend.
Anyone whose income is lower than the residential cost limit will have to dip into their assets to make good on any shortfall, unless their income and assets are sufficiently low to qualify them for means-tested help with care costs. Under current rules, those who do not own a home and just have financial assets are particularly vulnerable to seeing the bulk of those assets wiped out.
So, whilst the lifetime gap and more generous means-testing limits may seem a good step in the right direction this still will not guarantee that assets beyond £86,000 will be safe.
We would welcome transparent communications and their full implication from the government on any changes to The Care Act 2014 as part of this lifetime cap so individuals understand their position clearly.
How we can help
The changes, whilst not starting until April 2022, will still need to be budgeted and planned for. This comes at a crucial time where businesses are doing all they can to build back their businesses after the damaging impact of Covid. We understand that for some of you this may cause issues but do be assured, we are here to help. Please do discuss with your relevant MFW contact ways in which they can help you to prepare for this changes and achieve your business goals.
We can also help you with any payroll support whether that be on an ad-hoc, or on a more regular basis to help you prepare for these changes. Please ask us about our flexible and cost-effective payroll services.
For more information
If you would like to read more about the government’s plans for Social Care Reform, you can do so by visiting the GOV.UK website here. Note: You can read the HTML format online free of charge.
