Three cheers for the health and social care levy?

For the last decade or so, the levels of public spending on healthcare have diminished as a proportion of GDP. The COVID-19 emergency in particular has pointed up the need for more funding in this sector, and the present government made it an early priority with the September 2021 policy paper Build Back Better: Our Plan for Health and Social Care (last updated in February 2022). A main pillar of that review was proposals to introduce a new tax based on National Insurance contributions (NICs), and the Health and Social Care Levy Act 2021 (‘the Act’) was duly passed on 20 October 2021.

What is the levy and how will it work?

For a transitional year, 2022/23, an extra 1.25 per cent will be added to the rate of Class 1 (both primary and secondary), Class 1A, Class 1B and Class 4 NICs. This will be added to the National Health Service allocation, i.e. the amount of NIC allocated to the NHS before the balance is paid into the National Insurance Fund. To reflect the fact that earnings are sometimes paid as dividends, an extra 1.25 per cent is imposed on dividend income by the Finance Act 2022, bringing the dividend ordinary rate to 8.75 per cent, the upper rate to 33.75 per cent and the additional rate and trust rate to 39.5 per cent. The extra 1.25 per cent will only apply to those earning above the primary threshold or lower profits limit for NICs. For employers, existing reliefs for secondary Class 1 NIC will apply to the levy, including the £4,000 employment allowance.

From April 2023, the levy will become a separate tax charged at 1.25 per cent, based structurally on NICs and collected through the PAYE or self-assessment systems. Unlike in 2022/23, it will be ring-fenced for health and social care. The rates of NICs will return to 2021/22 levels but the increased rates on dividend income will continue. As well as the earned income of workers and dividend income, the levy (but not NICs) will be charged on any earnings of those above state pension age.  The Government expects the levy to raise on average an extra £13 billion a year UK-wide.

Is it enough?

One of the difficulties facing a government wanting to increase spending on health and social care for an ageing population is that the longer one waits to put an adequate funding structure in place, the heavier the demands and cost burdens on the existing service. For instance, the respected health charity the King’s Fund do not share the sanguine approach adopted by the Chancellor in his speech in the 2021 spending review. They say:

“ . . . look in the round at the public health announcements in this Budget, and you can’t help but feel there is scant evidence of the ‘new age of optimism’ the Chancellor described.”

The King’s Fund’s view is that without the staff to carry them out, there is little chance of the NHS achieving the objectives set by the Spending Review. That the NHS has an acute shortage of staff chimes with my own experience as a patient. Having recently spent five weeks on an orthopaedic ward, I was keenly aware of the clinical expertise and the dedication all around me, but frequently observed there were too few health professionals. And those who were on hand usually worked shifts of between 12 and 14 hours, often finding themselves rushed.

So, while the levy will help, as will the extra funds made available to the Department for Health and Social Care (DHSC), it may barely scratch the surface of the growing funding gap between advancing science and the needs and expectations of the population on the one hand, and what government feels able to allocate to health and social care on the other.

Is it fair?

There has been much discussion since the levy was announced about whether it is sufficiently progressive and whether it is levied on the right demographic.

Figures published by the Institute for Fiscal Studies show that NICs are broadly progressive in that richer taxpayers pay progressively more, in both cash terms and as a proportion of their income, than poorer, with one exception: the richest decile, while contributing more in cash terms, still pay a lower proportion of their income in NICs than either the ninth or eighth decile (second and third richest). This is because of the steep fall in the contribution rate above the upper earnings limit. But the IFS also point out that an increase in income tax would have been fairer, in the sense of more progressive, because income tax is charged at rates that rise progressively through the income distribution.

There is also the fact that neither NICs, nor (from April 2023) the health and social care levy, are charged on unearned income (apart from dividends that are sometimes paid instead of earnings) – those whose income is entirely from property rents, for example, escape both. Income tax, on the other hand, has a much broader base.

Nevertheless, politically, it would be a brave government that put up the rate of income tax in a parliament where it had won a substantial majority based on a manifesto commitment not to do so. There is also a widespread (though mistaken) belief, one that I have heard expressed even by health professionals, that NICs fund the NHS in its entirety. In fact, most NHS funding comes out of general taxation, and the National Insurance Fund (into which NICs are paid after the NHS allocation) chiefly makes payment of contributory benefits, notably the state retirement pension.

Two other points are that:

• NICs start to be paid at a lower level of income than income tax (although some groups qualify for NICs credits, including those earning between the lower earnings limit and the primary threshold), so that the burden falls more on working people with middling incomes than income tax; and
• as things stand, self-employed earners pay NICs at a lower rate than employed earners, a discrepancy that has become increasingly difficult to justify as there is no longer any substantive difference in the benefits for which the two groups are eligible.

So I would give no more than one-and-a-half cheers to the levy from the point of view of fairness.

How else is the Government funding health and social care?

It would be wrong to confine this discussion on health and social care funding solely to the levy. Also announced is an investment of £5.4 billion over three years to deliver the funding and system reforms set out in the above-mentioned policy paper Build Back Better: Our Plan for Health and Social Care. Specifically on adult social care, the Government pledges to:

• introduce a cap of £86,000 on the amount any individual will be required to spend on their own adult social care costs, from October 2023, but unlike under earlier proposals, means-tested support from local authorities will not count towards the cap;
• raise the upper capital limit (above which a person becomes ineligible for local authority support) from £23,000 to £100,000, with a means-tested contribution from those with assets between £20,000 and £100,000, again from October 2023;
• increase the lower capital limit (below which no personal contribution is required) to £20,000 from £14,250; and
• raise the minimum income guarantee and personal expenses allowance (that is, the amount of income a person can retain after contributing to their care costs) by the rate of inflation from April 2022.

The Government will also invest at least £500 million over three years in support for the wider social care system and staff.

We should also consider broader changes such as the freezing of personal allowances and certain other income tax thresholds (the pensions lifetime allowance and the lower and upper limits for liability to the high income tax benefit charge, for example). We do not know how much if anything of those changes will feed through into more funding for health and social care, but we were told in the 2021 Budget that the DHSC would receive overall a £42.9 billion cash increase in care resource spending over the current parliament to £177.4 billion in 2024/25.

Are there other possible sources of funding?

Apart from income tax, there is little doubt that the more than £15 trillion of household wealth  in the UK is currently undertaxed, given that existing taxes on wealth, such as capital gains tax, inheritance tax, stamp duty and council tax, are either small revenue-raisers, or (certainly in the case of council tax) downright regressive. There is a strong case for reviewing the operation of those taxes in the round, and two of them – capital gains tax and inheritance tax – have recently been examined by the Office of Tax Simplification but its recommendations have been adopted only in part.

I personally believe that a tax or taxes targeted specifically on general wealth could raise an appreciable amount in general taxation and would be seen to be fairer than one solely on income. For example, the CIOT/IFS joint debate recently looked at the idea of a one-off tax on the utilities. And the Wealth Tax Commission have put forward cogent proposals for a one-off wealth tax which they summarise as follows:

“A one-off wealth tax payable on all individual wealth above £500,000 and charged at one per cent a year for five years would raise £260 billion; at a threshold of £2 million it would raise £80 billion. This would be paid by individuals whose total wealth after mortgages and other debts, and after splitting the value of shared assets such as a jointly-owned family home, exceeded the tax threshold, and only on the value of wealth above that threshold.”

If the health and care sector received a share of the additional revenue so raised, more could be spent on the recruitment, training and retention of front-line staff, thus addressing the shortage to which the King’s Fund has drawn attention (above).

Conclusion

To the extent that they originate in NICs (including the levy), current proposals for funding the NHS and social care are essentially fair but could be much fairer if they had a broader base.

To the extent that they derive from general taxation, they are as fair and progressive as the underlying taxes contributing to that source, of which by far the biggest component is income tax.

If better-targeted taxes on wealth were added to the mix, the funding would not only be a lot fairer but would also correct the imbalance in our current system of taxation in its over-reliance on (particularly earned) income and its neglect of wealth. Three cheers for that.

Guest blog by Robin Williamson MBE, CTA (Fellow). Williamson is an author and commentator on tax, welfare and public policy. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018 and a senior policy adviser at the Office of Tax Simplification from 2018 to 2019. In May 2020 he won the lifetime achievement award at the Tolley Taxation Awards. He is author of Taxpayer Safeguards (published by Claritax) and is currently UK country reporter to the IBFD Observatory on the Protection of Taxpayer Right.