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

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

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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.