The wrong tax

Comment Piece: The prose and cons of Johnson’s reforms

Between 2012 and 2018 I watched my mother decline and suffer from dementia. Over the same years a succession of Prime Ministers did precisely nothing to solve the problem of social care. If I’m honest, my mother was lucky in that for all of her final months she was cared for at home. Many others in this country have not been so lucky. The burden of good social care, which can cost anything from £1,000 to £2,000 a week, is enormous. You are looking at a minimum of £50,000 a year. Even with house prices as they are, it only takes a few years in care to wipe out a families lifetime of accumulation. And you do not need to have ended up being asset rich.

So enacting a system today which will address that is welcome. The Prime Minister has announced that social care will be free for those with assets of less than £20,000. For those with assets totalling £20,000 to £100,000 social care will be means tested. For those with assets over £100,000 the cost of social care will be capped at £86,000.

This will be welcome for families who have dreaded the possibility of an elderly relative getting dementia or needing permanent care for other reasons.

However once again we have seen a system introduced which will leave the best deal for the richest part of our society. Why is means testing stopped at £100,000? The principle of means testing is fair. It allows everyone to pay according to their means.

It is not clear to me why a person with an estate worth over £1m should have social care costs capped at £86,000. It seems perfectly clear that a system that does not wipe out a families assets completely is desirable. But the cap that is to be instituted under these reforms simply benefits the richest in society the most.

The same flawed ideal permeates the way Johnson intends to pay for the NHS and Social Care. Using National Insurance (NI) is a bizarre choice. It is a regressive tax. Yet Johnson proposes to increase NI by 1.25% on everyone. Certainly aspects of it have been improved. Pensioners will now pay NI so that all people of all ages are contributing.

But let us look at how NI worked before the changes.

  • Salaries up to £9,564 pay no NI
  • Salaries between £9,564 and £50,268 pay 12%
  • And here’s the kicker. Salaries over £50,268 pay just 2%

In other words it is a tax regime where the richer you are, the less you pay as a % of your wealth. In sharp contrast Income Tax works in the other direction.

  • Earnings up to £12,750 pay no tax
  • Between £12,571 and £50,270 you pay 20% tax
  • From £50,270 to £150,000 you pay 40% tax
  • And over £150,000 you pay 45%

In short, unlike NI income tax works in such a way that the richest in society pay more. So the solution that Johnson has come up with, is regressive. It is true that the differences are not great numerically, but there are two important practical differences. Under income tax you pay no tax until you have £12750 earnings. So more of the lower paid will escape the new tax altogether (under NI it is only up to £9,564). And secondly pensioners already pay income tax, so there is no need for any complicated systems changes. Government and big IT changes. I mean what could possibly go wrong?

And Johnson has said the big reason he didn’t use income tax is “income tax isn’t paid by businesses”. It isn’t. But Corporation Tax is. And there is no explanation as to why Income Tax and Corporation Tax could not both be increased by 1.25%

The plus side of what he proposes is that the money raised will “hypothecated in law to health and social care”. But this too is bizarre. After all that was pretty much what National Insurance was meant to be from the start. So why is only 1.25% to be hypothecated. It makes no sense. If all NI is once again to be hypothecated in law to health and social care, that would be a positive move. NI has become a tax that just contributes to the general running of government. But to have part of NI hypothecated and part of it not is frankly bonkers. And a major missed opportunity. The Government should and could have restored NI as an hypothecated tax for health and social care.

But for now, at least we have a starting point. A system that over the past 9 years government has avoided creating. Now it is in place others can come along in the future and tweak and remould it to make it work better.

4 comments

  • All a bit subjective!
    So those who have worked hard, saved well, invested in their property and have already paid a shed full of tax should get hammered in their old age?
    At the other end of the spectrum, those who have avoided work and played the system will continue to reap the rewards in their old age!

    • Neil’s right. My father, a bricklayer, died when my mother was 43 and she had to bring up children and keep a roof over her head, working as a shop assistant. When she died at 86 after nearly 11 years in care with vascular dementia, of which she self-funded for 10, everything had been sold and her savings consumed to pay the care costs. She would have been better off living in rented accommodation,not struggling to buy her home, and instead of the stress of making ends meet on low pay as well as bringing up her children, she could have lived on benefits. Her hard work made no difference at all at the end of the day. A friend’s mother who never worked outside the home once she had her first child and is now 80, has everything provided by the State – pension, top ups and a lovely warden-assisted bungalow. No wonder people don’t want to bother to work.

  • I agree with Neil and nemesisnemesia (not a relative!)
    Thirty years or so ago I was made redundant when my employer folded. Whilst job hunting I signed on – not unreasonable. What surprised me was not that, as a home owner with both a mortgage and a bank balance, I wasn’t going to receive any cash payments but that the man in the Dole Office had this little bit of wisdom: “if you’d spent all your money in the pub every evening and now been broke and out of work, living in rented accommodation, we’d be paying you a lot of money”. Or to put it another way: “Means testing is for the benefit of spendthrifts”

  • It seems the main reason for these new taxes is basically to enable children (or even, say, charities if there’s no children) to inherit more from their parents’ home than they otherwise would (at least that’s the impression from today’s newspapers), yet the UK Government’s overt massaging of property price increases (SDLT holiday, ultra low interest rates from incessant QE, SEISS, CJRS and all the rest of it) means those kids are already (or will be) better off by (more or less) any such purported shortfall.

    So it’s all a bit crazy looking (as usual for this Government) to me (unless this is all meant to additionally increase IHT receipts to plug the gaping hole in the UK’s finances generally).

    In short, much of the Government’s excessive debt (that justifies the new taxes) has been used to inflate the prices of the homes that these children are then complaining is not inflated enough net of care home fees i.e. they want to have their cake & eat it!

    Workers over 40 with no (living) parents/grandparents or children appear to be hit hardest, as they will be subsidizing everyone else (assuming they are happy to pay for their own care in due course from their main home – which seems not unreasonable as it’s a PPR tax-free windfall over many years of such Government massaged property price increases)It is young people with poor (grand)parents are perhaps screwed most of all, as they are subsidizing the (grand)children of wealthy (grand)parents – which is an obvious problem point (unless you are rich with (grand)children), as noted by many others.

    For 2022/23 it will be an increase in the NI rates as there is not time to amend their systems.
    For 2023/24 it will be a separate Levy.
    Whilst those over pension age no longer have to pay Ees NI, they WILL have to pay the levy.What has been confirmed is that the replacement Levy, in 2023-24 and onwards, will apply to employee’s earnings even if they are older than SPA (although we are still waiting to hear if that is applied to gross earnings, or NI’able earnings, or some other definition)..

    The real difference between NI and taxes is that Taxes are cumulative. NI is paid on a weekly or monthly basis for 90% of taxpayers.
    This means for example, a seasonally employed person at a seaside town could well pay more NI over a few summer months, than he or she would pay similar tax over a year on a cumulative basis.
    This particularly applies to person in the entertainment and or music industries.

    As is depressingly becoming the norm HM Government with HMRC will choose the cats-cradle complicated over the relatively straightforward.

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