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National insurance tax to fund the NHS and social care is not an equitable solution

There are those who will applaud the Boris Johnson’s government for tackling the social care issue. Given that some may of their predecessors have sought to dodge the issue. But according to Bloomberg this is far from an equitable measure as on the face of it the new task is skewed in favour of the better off.

The National Insurance payroll tax

As a temporary measure, the Government 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.” Boris Johnson says 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.

According to Bloomberg there are unfortunately, 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.

Lower earners will pay disproportionately more

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.

Avoiding the introduction of new income tax

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.

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.

Summary

The Boris Johnson Government deserves credit for grasping the nettle and coming up with a solution to the problems of funding social care. But it is the choice of National Insurance as the vehicle for raising the tax is the point of issue here. As Bloomberg have identified it is a tax that is skewed in favour of the rich and disproportionately requires more from the lower paid. ‘Levelling up’ should mean more than a conservative political slogan it should also apply to equality in the payment of social care funding. The Government can claim that they have kept to their manifesto and not introduced a new form of taxation. But this has come at a cost, effectively penalising the lower paid, I think they should have found a more equitable solution.

Albert Cook BA, MA & Fellow Charted Quality Institute Managing Director Bettal Quality Consultancy

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