I’ve spent some time reading the government’s documents and have been able to reach some conclusions about it. There’s plenty of political commentary about it, but a distinct lack of facts! I’ll stay away from the political side of things – other people are much better at that – and stick to the facts.
So, what is actually going to happen?
- A new tax is going to be introduced.
- There will be a new system of paying for care.
The New Tax
The new tax, the Health & Social Care Levy, will be introduced in April 2023. However, as it takes time to organise a new tax, National Insurance rates will increase from April 2022 (and they should go back down in April 2023).
So, from April 2022 to April 2023, employers, employees and the self-employed will pay an extra 1.25% per year in National Insurance. Note that employers as well as employees will pay the extra amount, so an extra 2.5% of National Insurance is going to be collected on salaries. This extra National Insurance won’t be paid by people who are over state pension age.
From April 2022, dividend tax rates will rise by 1.25%, so tax of 8.75% will be due on dividends paid to basic rate taxpayers, which exceed the £2,000 allowance. This increased rate of tax is paid by everyone who receives dividends – there is no exemption for people who are over state pension age. Unlike the increase in National Insurance rates, there is no suggestion that dividend tax rates will reduce in April 2023.
From April 2023, the new tax is introduced. The Health & Social Care Levy will be charged at a rate of 1.25% on earned income, and will be paid by employers, employees and the self-employed. There is no exemption for people who are above state pension age. However, it will not be collected on non-earned income, such as pensions, dividends or interest.
Paying for Care
Whilst the government chose to announce the new system for paying for care at the same time as announcing the new National Insurance rates and the new tax, the two are not really connected.
The new system for paying for care will be introduced in October 2023. There is no mention of how those, who are already paying for care, will be affected.
In order to have a chance of having financial support for care costs, you will need to have your needs assessed by your Local Authority. They will work out what sort of care you need and then go through a means test assessment, to identify whether the Local Authority should contribute. Note that it is the Local Authority, not central government, which will provide the financial assistance. Whilst this is similar to the current system, the government states that a new means test will be introduced in October 2023.
If the Local Authority means test concludes that you have assets of more than £100,000, you will not qualify for any financial assistance. However, once you have paid £86,000 towards the cost of personal care, the Local Authority will pay for eligible care costs. It’s really important to note that:
- Only the cost of personal care is covered. The cost of accommodation, food, heating and light will not be covered. In our part of the world, the cost of care is often around £6,000 a month; it’s not clear how much of that £6,000 will be attributable to “personal care”, but it seems likely that it will be less than 50%. If we assume that the personal care element costs £2,000 per month, you would need to receive that care for nearly three years before your costs exceed the cap. It isn’t clear how long the average duration of a stay in care home is. The LSE put the figure at 462 days back in 2017, but previous surveys have shown the average duration in a residential home as being 841 days, and 528 days in a nursing home. The proportion of those who need care and who exceed the cap is likely to be pretty small.
- Only eligible personal care costs are covered. The government papers do not mention what is “eligible” but it seems likely that only those costs, which the Local Authority has agreed, will be paid. I would expect that this is an area which may cause disputes in the future, particularly if you choose to have a “premium” level of care.
If you have less than £100,000 of assets, then you may be eligible for financial assistance with the cost of care. Your home will be excluded from the calculation, if you, or your spouse or partner (or, sometimes, another person) continues to live there.
Income tax was introduced in 1799 as a temporary measure to cover the cost of the Napoleonic Wars. It seems likely that the Health & Social Care Levy will be with us for some time.
The new system of paying for care will provide some assistance to those who don’t have much in the way of savings or assets in later life. It is unlikely to help anybody else.
Planning to rely on your Local Authority to deal with your care in later life is a risky move. It remains sensible to plan to ensure that you can afford the type of care which you would like, should you be one of the unfortunate ones who need it. We can help you to work out how best to organise your finances to achieve this. If you would like to know more, take a look at our blog post on the best way to plan for the cost of care, or contact us.
Philip Wise | email@example.com
Managing Director and Chartered Financial Planner