The cuts in earnings and benefits that have been announced and will be announced are the price we pay for years of neglect of our care system and for our lack of preparation for the pandemic. The two are linked, in the early months of the pandemic, residential care facilities were incubators of the Coronavirus and thousands – mainly elderly – residents, died because our hospitals and care homes couldn’t cope. Funded by private equity, most care homes are run for profit and had no margin for the error of mass migration of dependent hospital patients in Q2 2020.
This may have been the catalyst for this Government finally addressing the conclusions of the Dilnot report.
The reporting of the measures being put in place has been playing catch up with their severity as it was revealed yesterday.
Misconception one – it’s a 2.5% not 1.25% NI hike
So. Tax on earnings will go up 2.5% (whether the cash is handed over by employers or employees it is still a tax on earnings) and tax on dividends by 1.25% and tax on rents or interest income by 0%. The measures favour those who don’t have to work for a living.
— Jo Maugham (@JolyonMaugham) September 7, 2021
This is not a 1.25% rise in national insurance, it is a 2.5% rise. The employer’s bit may not be noticed on your pay-slip but it will be front of mind when salary increases are next considered.
Misconception two – pension income
Pensions in payment will not, contrary to reports in the Daily Mail, be subject to NI -even for those still in work. However those in work after state pension age, will pay the extra NI on their earnings.
It was no surprise to hear that the state pension triple lock would become a double lock for a year. Theresa Coffey slipped this into the mix and debate on it is unlikely to be that great. Nonetheless it represents a second reversal in manifesto pledges. If you were under the misconception that Covid 19 would award you an 8% increase in your state pension, you aren’t now!
Misconception three – this increase will become a third income tax.
This is an extension of NI. In the short term, we will simply see our NI go up on our pay-slip (this starts in April 2022). However, from 2023m, the 2.5% on the NI band of earnings will become a third tax, a healthcare levy that will introduce all kinds of complexity and no doubt a number of tax avoidance measures.
The payroll industry are going to have a busy time of it over the next 19 months.
Misconception four – “no one will have to sell their house for care”.
The 2.5% increase is going to fund a more generous care system. The “floor and ceiling” measures being introduced will mean that more people will pay less and some with limited assets won’t pay at all. But while the increase in payments is in 6 months, we will have to wait another year for the benefits to kick in and when they do, they will still leave many in peril of having to sell their houses.
As the IFS point out (see link below), the initial use of the extra revenues will be to help the NHS get over the waiting lists which we are told still haven’t peaked. There is an excellent analysis of how this will happen but it will be dawning on the nation over the next few days that these payments are in lieu of the £38bn reportedly spent on track and trace.
If the revenues from the taxes are £36bn – as predicted – they are in effect , the price we have paid for our failures in preparedness for a pandemic. While no-one is doubted this money had to be raised, we should be under no misconception that we are paying the price for some poor decision making in 2020.
The floor and ceiling promises will still leave many people at risk of having to sell the family home, these reforms are not as generous as Dilnot recommended and they will not bite for some time. Most importantly, there is a distinction between meeting the cost of care and the residential costs of care homes (sometimes called the hotel costs). The hotel costs often dwarf the care costs.
The £86,000 cap does NOT cover 1. The accommodation part of care home fees 2. Any personal care the local authority says the claimant is not frail enough to need 3. Any excess of privately arranged care over a figure that the local authority deems it should cost. Am I right? pic.twitter.com/lcHM1h0qan
— Adrian Boulding (@AdrianBoulding) September 8, 2021
The IFS’ predictions for the future for inclusive care is not bright, even with these reforms
While the precise path for spending – and hence for the availability and quality of care – is unclear, it is clear that the extra funding will not be sufficient to reverse the cuts in the numbers receiving care seen during the 2010s. Thus, while more people will become entitled to financial support as a result of the reforms planned, many people with care needs not considered severe enough will continue to miss out.
Misconception five – the 1.25% dividend tax will not touch pension funds.
As well as escaping the NI hike on their pensions in payment, those with pension savings look like escaping the 1.25% dividend tax on their pension pot.
Pensions are not threatened by the increase in dividend taxation. The 1.25% levy on dividend income, designed to catch those who live off dividend income , will not be levied on our pension funds.
— Josephine Cumbo (@JosephineCumbo) September 7, 2021
This appeared as a correction during yesterday. It appears from this FT article that savings within ISAs will also be exempt from this additional tax.
For the detail and the wider picture
For more details on how the benefits will be distributed and who will pay the bulk of the cost, this excellent resume from the IFS is today’s best reference point. The IFS show with charts that the vast bulk of the cost will fall on those in employment (the self-employed will get off lightly). Implications for future employment practice are worrying – who would be an employer if workers can be contracted from self-employment?
Our analysis of today’s announcements can be found here https://t.co/qz3NMvNdNW
— Paul Johnson (@PJTheEconomist) September 7, 2021
While those with earnings worth taxing , worry about national insurance and healthcare levies, those whose incomes are insufficient for tax to be the major consideration have quite a different worry on their doorstep.
Our analysis shows that 1 in 3 working age families with children in over 400 constituencies across Great Britain will be impacted by the cuthttps://t.co/kN7WrK3ETk
— Joseph Rowntree Foundation (@jrf_uk) September 7, 2021
Once again , it appears that those on the lowest rungs of the income ladder will be paying the heaviest price for a national calamity.