AJ Bell’s Tom Selby comments on Boris Johnson’s announcement that a new ‘Health and Social Care Levy’ of 1.25% will be introduced to fund radical long-term care reforms
Tom Selby, head of retirement policy at AJ Bell, comments:
“The Government appears to have been spooked by the backlash over plans to increase National Insurance Contributions to fund its radical social care reforms.
“Those proposals would have loaded the costs on younger workers, sparking accusations of intergenerational unfairness.
“Instead, the Government has decided to badge up the tax increase as a 1.25% ‘Health and Social Care Levy’, with workers of all ages required to pay.
“Of course, the bulk of the working population are still under state pension age, meaning in reality this is a National Insurance hike in all but name and it is almost certainly still younger people who will pay the lion’s share of these costs.
“This is likely to prove unpopular with voters, with less than 1 in 6 (15%) of people questioned yesterday saying they’d support an increase in National Insurance to fund social care reform. What’s more, it’s a clear breach of the Conservative’s manifesto ‘triple tax lock’.
“Increasing dividend taxation feels like a last-ditch attempt to convince voters that all sections of society are sharing responsibility for funding social care reform.”
Long-term care reforms
“By using the proceeds to introduce a lifetime cap on social care costs set at £86,000, the Prime Minister will be hoping to limit people’s exposure to ‘catastrophic’ costs and encourage more insurers to enter the market.
“While voters may not thank him for this in the short-term, there is little doubt the UK’s creaking social care framework is in desperate need of reform.
“Although we await more details of how the plans will work, it’s worth noting previous proposals for a cost cap put forward by Andrew Dilnot did not include ‘hotel costs’ – such as food and accommodation – but rather the cost of the care itself.”
Boosting salary sacrifice and tax wrappers
“Assuming the new Health and Social Care Levy operates in a similar way to National Insurance, pensions salary sacrifice should become more attractive as a result of this announcement.
“Savers will be incentivised to boost salary sacrifice contributions in order to reduce their overall tax bill, while also boosting their retirement pot and benefitting from tax-free investment growth in the process.
“The increase in dividend tax means people investing outside tax sheltered wrappers like pensions and ISAs should review their portfolios to make sure they are making as much used as possible of their annual contribution allowances to keep their tax bills as low as possible.”
