The rumoured NI hike, which is expected to be announced next week, is anticipated to be anywhere between 1 and 2 per cent, with health secretary Sajid Javid reportedly pushing for the higher rate.
The proceeds will then be split between funding care costs above a certain cap, and providing funds for the NHS.
But as it is National Insurance, as opposed to any other tax such as income tax, the increase will only apply to the 26m people in active employment, not pensioners.
With no clear plans to make National Insurance payable on earned income over the state pension age, experts have aired their concerns over how this tax increase will impact younger savers.
Shaun Moore, tax and financial planning expert at Quilter, said prime minister Boris Johnson “clearly hasn’t read the room since the plans were last floated and then shelved in July”.
He added: “The cabinet threatened a revolt then, and they are making the same threat now given the regressive nature of a hike in National Insurance.
“Those on lower incomes and the young will pay relatively more, and those working over state pension age pay nothing at all. The optics of such a proposal are not great.”
In July, Johnson, Javid, and Chancellor Rishi Sunak came close to announcing the tax rise, but then had to isolate due to Covid-19. With just a week until parliamentary recess, the plans were shelved.
“The PM had the time to go back to the drawing board over the summer recess but decided to make no changes. He could have instead favoured an increase in income tax, or a removal of the National Insurance exemption for those above state pension age," Moore said.
“Removing the National Insurance exemption won’t raise that much in the grand scheme of things, but it would at least make it seem that everyone is in the same boat.”
Keeping it fair
In an interview with Radio 4, former health secretary Jeremy Hunt agreed a National Insurance rise was unfair in nature.
“Since older people are the biggest beneficiaries, it’s fair they should make a contribution,” he said. Instead, he suggested an alternative tax rise, which doesn’t “disproportionately target the young”.
Representative body the Independent Care Group, whilst welcoming the reform, echoed Hunt’s sentiments.
Chairman Mike Padgham said: “Personally, I think an increase in income tax might be a fairer way to do it, but no doubt the details will be ironed out in the future.”
He said the ICG had waited 30 years for reform, with 1.5m people currently not getting the care they need.
As part of the National Insurance rise, the NHS would benefit from the funds too in order to help cut down wait times. According to reports, the hike could raise around £10bn a year for the Treasury.
Steven Cameron, pensions director at Aegon, said the government needed to find a stable, sustainable system with costs fairly funded, shared between the state and individuals.
What's more, the UK has devolved powers for social care arrangements over time, meaning separate nations set income tax rates and bands.
Cameron pointed out that with the different approach to social care in Scotland, for example, questions should be raised as to “the fairness” of a UK-wide hike in National Insurance.
NI rise 'precursor' to more tax reform?
Over the years, research has pointed to UK adults' preferences on social care reform.
In 2019, AIG Life published a survey of 3,000 adults which showed nearly half (48 per cent) of adults would be willing to save into a special fund to pay for any care they might need in later life.
Some 31 per cent agreed a social care tax after a certain age would be acceptable, and a larger 34 per cent agreed a rise in income tax would also be acceptable.
But "placing the cost on the shoulders of younger working people" is problematic, according to Sarah Coles, personal finance analyst at Hargreaves Lansdown.
She continued: “It raises the question of whether the government is specifically choosing to do this, or whether this is the precursor to making National Insurance payable on earned income over state pension age too.
“Unfortunately, while any kind of a plan is welcome at this stage, there’s still likely to be an interminable wait for the solution to come to fruition.”
Coles recalled the Dilnot Commission, set up more than a decade ago, which said care costs must be capped. “At least we’re starting to get an idea of how things may shape up.”
According to The Telegraph, the government intends to cap the social care costs paid by any one person in their lifetime in the region of £60,000 to £80,000.
In England, if a person has assets of less than £14,250, the council may pay for their care depending on income. Those with assets between £14,250 and £23,250 can receive some help, but also have to contribute to the cost of care.
“Whatever solution is eventually in place, people will still need to think carefully about saving for their own care, as whatever is on offer is likely to be the bare minimum,” said Moore.
“Personal provision for social care will make up the vast majority of how someone pays for the care they need, and it certainly won’t be a small amount so people should think carefully about not only saving for retirement but also for social care.”
ruby.hinchliffe@ft.com
