7th September non-Budget
Major tax and social care changes
In early September a triumvirate of the Prime Minister, Chancellor and Health Secretary presented the Government’s long-awaited plans for the reform of social care in England (the devolved nations each have their own framework). The statement from the Chancellor alone contained large enough tax changes to have constituted a Budget in quieter times.
Funding of social care: the non-tax costs
The proposed changes would mean that if you enter residential care in England from October 2023 onwards:
If you have assets above £100,000, you will still have to pay full care costs. If you are single, your main home will be included as an asset, but if you have a partner or dependent living in the property, its value will normally be ignored. The current capital ceiling is just £23,250 and this will continue to apply for anyone entering care before October 2023.
There will be a new lifetime cap of £86,000 on the amount that you will need to spend on personal carecosts. The costs of your accommodation and food – so-called hotel costs – will fall outside the new cap.
If you have assets below £20,000 (current ceiling £14,250), you will not be required to use your savings (or the value of your home) for care costs, but you may need to make a contribution from your income.
If you have assets in the £20,000-£100,000 range, you will be expected to make a contribution from your income. In this instance income includes ‘tariff income’, which is notional income from capital above £20,000. The proposals say this will be ‘no more than 20%’ (currently 20.8%). For example, if you had capital of £80,000 your ‘tariff income’ would be deemed to be £12,000 a year, all of which could go towards meeting your care costs.
Funding of social care: the tax costs
To finance the higher capital means-testing limits and the £86,000 cap, the Government announced the introduction of increased NICs under the guise of a new Health and Social Care Levy (HSCL):
In the next tax year (2022/23) the HSCL will be applied as a 1.25% increase in Class 1 (both employer and employee) and Class 4 main and higher rates of NICs.
From 2023/24, NIC rates will return to their 2021/22 level and the HSCL will become a separate 1.25% charge applied to all employed and self-employed earnings. However, unlike NICs, from 2023/24 the HICL will be paid on the earnings of employees and the self-employed above state pension age (SPA - currently 66). At present only employers pay NICs on employees beyond SPA.
|
Tax year |
Employee Main / Higher |
Employer
|
Self-employed Main / Higher |
|
2021/22: NICs |
12% / 2% |
13.8% |
9% / 2% |
|
2022/23: NICs |
13.25% / 3.25% |
15.05% |
10.25% / 3.25% |
|
2023/24: NICs HSCL |
12% / 2% 1.25% |
13.8% 1.25% |
9% / 2% 1.25% |
|
Threshold (21/22) |
£9,568 /£50,270 |
£8,840 /N/A |
£9,568 /£50,270 |
From April 2022, tax on dividends will also increase by 1.25%, as shown in the table below:
|
Tax year |
Basic rate |
Higher rate |
Additional rate |
|
2021/22 |
7.5% |
32.5% |
38.1% |
|
2022/23 onwards |
8.75% |
33.75% |
39.35% |
Funding of social care: the state pension cost
While the focus was on the social care announcement, the Department of Work and Pensions (DWP) revealed that it would suspend the operation of the State Pension Triple Lock for the coming year only. Instead, there will be a Double Lock, meaning the basic and new State Pension will increase by the greater of:
2.5%; and
CPI inflation to September 2021.
The DWP estimated that the switch to a Double Lock will ‘…mean a difference of around £4 or 5 billion in basic and new State Pensions expenditure in 2022/23’, which compares with the £12bn generated by the NIC and dividend tax changes. The Double Lock saving is not a one-off but an annual reduction in expenditure, as all future State Pension increases will be from a lower base than would otherwise have been the case.
The increases to NICs and dividends represent a major reform to the tax system and will have important consequences, particularly if you are a company owner-director or self-employed. In practice, the changes to social care funding – two years away, do not forget – could still leave you facing potentially large costs to meet. The Government’s own example suggests it is only those who stay in a care home over three years and four months who stand to benefit from the cap.
If you think any of September’s proposals could affect you, talk to us now about their impact and what changes you may need to make to your financial planning.