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The new health and social care tax: is it fair?

12 October 2021 | Posted by Shaq Magee

Guest post by Shaq Magee, Co-Founder of Millennial Money UK

On September 7th, Prime Minister Boris Johnson reinforced the age-old idiom that “nothing in life is certain except death and taxes” by announcing a health and social care tax to help the NHS to recover from the impact of the pandemic.

What has changed? 

The new levy will see a 1.25 percentage point increase on National Insurance Contributions (NIC) from April 2022 and will apply to both employed and self-employed individuals, aiming to raise £12bn a year. While many have called for increased taxes to help fund the NHS, the government has received criticism for this particular direction they have taken. 

What are National Insurance Contributions? 

NIC are a tax on your earnings, paid by both employees and employers to help to build your entitlement to state benefits such as:

  • The State Pension
  • Statutory maternity leave
  • The NHS
  • Unemployment benefits
  • Disability benefits

As it stands, you start paying NI once you earn more than £9,568 a year and stop paying once you reach State Pension age. The rates that individuals pay is as follows:

  • 12% on earnings between £9,568 and £50,294
  • 2% earnings over £50,284

A disproportionate impact on low and middle income workers 

Putting aside the fact that the increase breaks a Conservative manifesto pledge to not raise income tax, National insurance or VAT, there have been a number of criticisms of the new levy. 

The main criticism that the NIC increase targets and impacts the “wrong” group the most. In the above graph, you can see that it will have the highest impact on low to middle paid workers. For example, the new total NIC for workers on £30,000 will be 9% of their total salary, whereas for those on £80,000, NIC will be 7.9%, with this % reducing as salary increases. 

This makes the NIC levy a regressive tax, as the tax rate decreases as the taxable amount increases. Given that millions are already feeling a tightening of their finances with rising energy prices and benefits cuts, to many it seems unfair to force lower earners to contribute even more.

The last 18 months saw healthcare workers on the frontline work through long hours without proper protection to help combat the pandemic. This tax rise that is set to inflict a “terrible” financial toll on health and social care workers and their families, according to official analysis carried out by the House of Commons library. In the report, it’s stated that 12% of the total raised from employees through the tax rise will be fronted by these workers. In total, nurses, care home staff, and other health and social care workers will contribute an additional £900m in tax. 

Wealthy but retired people do not have to pay the tax 

As well as top earners being impacted less, another criticism is that retired individuals will not be affected at all as you stop paying NI once you retire. This is problematic for two reasons: the first being that retired individuals are the biggest users of health and social care. A 2016 report by the Nuffield Trust found that two-fifths of national health spending in the UK was spent on over 65s, with that figure predicted to increase as the country ages*. The second reason is that on average over 65s are wealthier than any other age group. So in summary, the younger and less well off are being told to disproportionately fund a service heavily used by the old and rich(er). 

How else could the government raise the money? 

There are a number of alternatives to raising NIC that could help to raise the estimated £10bn a year required to overhaul and support the health system. 

One option could be to introduce a wealth tax, essentially asking the very richest in our community to contribute a bit more. A 1% tax on millionaires was estimated to raise £260bn over five years**. 

Not only would this be able to fund the health and social care increase for 26 years, but it would also lessen the financial strain on lower-paid workers. One of the reasons that NI is being raised is that it’s more palatable than raising income tax for the public, however, an increase in income tax would ensure that both the wealthy and retired individuals pay their fair share.

Students getting an unfair deal 

To top all of this off, the government is reportedly planning to lower the salary level that graduates will start paying back their student loan, decreasing it from £27,295 to around £23,000. This means that in addition to the 42.25% marginal tax rate that graduates will find themselves paying from April 2022, they may also need to repay their student loan sooner. 

Our only hope now is that a Government that has backtracked on seemingly every announcement over the past 2 years will see sense and find an alternative way to fund health and social care.

*https://www.theguardian.com/society/2016/feb/01/ageing-britain-two-fifths-nhs-budget-spent-over-65s

**https://www.lse.ac.uk/News/Latest-news-from-LSE/2020/L-December/Wealth-Commission-report


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