ProtectionJul 31 2018

Would an over-40s tax solve the social care crisis?

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Would an over-40s tax solve the social care crisis?

An ageing population, coupled with reductions in local authority funding, means the government is under significant pressure to reform adult social care. And, while a series of reviews and commissions have been published over the past 20 years, a recent cross-party report throws some further suggestions into the ring.

The Housing, Communities and Local Government and the Health and Social Care Committees’ joint report, ‘Long-term funding of adult social care’, was published at the end of June. It describes the social care system as “under very great and unsustainable strain” and calls for a number of changes to taxation to generate the necessary funding.

Social care premium

Central to its recommendation is the introduction of a new tax, the social care premium, which would be paid by the over-40s. This would be an earmarked contribution specifically for social care, either as an addition to national insurance or into a dedicated not-for-profit social insurance fund, such as that in place in Germany.

Contributions would be made by both individuals and their employers, with a minimum earnings threshold in place to protect those on low incomes. In addition, although national insurance ceases at state pension age, the report proposes that the social care premium would be paid by the over-65s.

It also calls for the government to consider lifting the maximum higher-rate tax threshold (£46,350 for national insurance in 2018-19) for the social care premium and to include unearned income, such as pensions and investments, in the calculation.

Looking at the German model, which was introduced in 1995, gives some insight into how a social care premium might work. In 2018, a contribution rate of 2.55 per cent is levied on up to €4,425 (£3,900) a month of assessable income, with the employer paying half of this contribution. In recognition that they will have fewer options for support from their families, childless adults pay an additional 0.25 percentage point premium, taking their total contribution up to 2.8 per cent.

Interestingly, to help employers stomach the additional cost, the German government removed a bank holiday when it introduced its social long-term care insurance, except in the state of Saxony, where employees pay around 70 per cent of the total contribution.

Whether or not the UK would need to follow the German example and forfeit a bank holiday, the concept of a social care premium has received broad support. 

Rachael Griffin, tax and financial planning expert at Old Mutual Wealth, says: “Many people do not know how their money is used when they pay national insurance. Having a separate pot that is earmarked specifically for social care does create the necessary transparency and, alongside education around what is required and the costs, should help to give consumers the confidence to determine whether they need to make additional provision.”

Additional revenue streams

Alongside this tax for the over-40s, the report also recommends an increase in inheritance tax on estates above a set value. This additional payment would be capped at a percentage of the total value of the estate, but it would help to ensure sufficient funds were in place until funding through the social care premium was able to meet demand.

While one of the key principles used in the report is to ensure fairness in the way that social care is funded, including between the generations, Ms Griffin argues that the notion of additional tax being levied on estates worth more than a set level flies in the face of this. “Politically, taxing the wealthy will land well with the masses but, by preventing the flow of money down a family, it could actually create more intergenerational inequality. Depending on where the levels are set, it could also lead to more lifetime gifting to keep wealth in the family. The devil will be in the detail.”

The report also recognises the role of local government in care funding. To ensure local authorities are able to continue meeting growing needs for social care, it recommends reform of the council tax valuations and bands to bring them up-to-date. These inevitably higher taxes would then be supplemented by diverting some of the additional business rate retention that comes into effect in 2020.

Care expectations

As well as detailing how the public could help to fund adult social care, the report also outlines what it believes consumers should expect in return. Where an individual requires care, it recommends that the personal care element, which includes support with activities such as washing, dressing and eating, should be provided free at the point of use, but accommodation costs should continue to be paid on a means-tested basis.

Currently, the means-testing threshold is £23,250 in England and Northern Ireland (£26,500 in Scotland and £30,000 in Wales), meaning that anyone with assets and savings above this level would be expected to pick up the tab for their care costs.

However, in keeping with the thinking behind the Dilnot Commission in 2011, the report puts forward an option to raise the means-test threshold to enable individuals to retain a greater proportion of their assets.

Another recommendation, also in line with those put forward by Dilnot, is a cap on the amount that anyone pays towards their care. This would effectively pool the risk, ensuring that individuals unfortunate enough to require extensive care would not be left facing catastrophic costs.

Financial services opportunities

Although these are just recommendations at this stage, and extensive modelling will be necessary to determine the contributions required, Karen Brolly, head of products, life and financial services at Hymans Robertson, says there are potentially plenty of opportunities for financial services providers and advisers.

As an example, she points to accommodation costs, which the report proposes will remain means-tested. “An average care home is around £30,000 a year, with around half of this accommodation costs,” she explains. “Once consumers have more certainty around the numbers involved and how their care will be funded, they will be more confident to put the necessary financial planning and insurance products in place. Doing this will give them choice around where they receive care.”

This lack of certainty surrounding long-term care means that financial services products are currently focused on immediate rather than future needs. For example, Just offers a care-funding plan that is an underwritten annuity guaranteed to pay a set amount for the rest of the person’s life. While this can give the individual and their family the certainty that costs will be covered, it is aimed at people entering care.

But this is likely to change as greater certainty around funding requirements leads to more confidence among both insurers and consumers.

Already, insurers are beginning to suggest potential product designs. As an example, earlier this year Royal London floated the concept of a care pension, enabling people to top up their future care, in much the same way that private pensions allow them to improve on state provision.

Under this, consumers would be able to purchase care insurance at retirement, with the premium, either lump sum or regular, funded from the pension. As an incentive, this premium would be paid tax-free. Steve Webb, director of policy at Royal London, explains: “This type of arrangement would also incentivise insurers to do more preventative work, such as reducing the risk of an elderly person falling or ensuring they have care and support in the home, in a similar way to the early intervention initiatives used by the income protection insurers. This would be good for society.”

Whether or not the government picks up any of the recommendations put forward in the latest report remains to be seen. But, with a green paper on care and support for older people expected in the autumn, it certainly offers an opportunity to test public appetite for a number of different ways to fund adult social care.

 

BIG NUMBERS

£2.2bn-£2.5bn

The gap in social care funding expected by 2019-20 (Housing, Communities and Local Government and the Health and Social Care Committees) 

89%

Of councils regard national taxation as part of the solution to adult social care funding (Local Government Association)

£31,200

The average annual cost of a residential care home (LaingBuisson) 

£43,940

The average annual cost of a care home with nursing (LaingBuisson) 

1 in 4

People will need long-term care or support in later life (Association of Directors of Adult Social Services)