1.25% National Insurance Rise Announced

September 8, 2021

Alain Tolhurst and Kate Proctor, Politics Home

The prime minister has finally unveiled his plans to overhaul the UK’s social care system with a new tax of 1.25% to raise an extra £36billion over the next three years. From next April every person in work will pay the additional amount on their National Insurance contributions, and then from 2023 it will be a separate levy to fund care as well as help tackle the NHS backlog. It means Boris Johnson has abandoned his pledge in the 2019 Tory manifesto not to raise the main rates of taxation, but told MPs "a global pandemic was in no-one's manifesto".

The additional revenue would pay for the biggest catch-up programme in the history of the NHS in England, as well as trying to end what Downing Street described as "unpredictable and catastrophic" care costs faced by many families. The NI increase means the amount a person will have to pay themselves for their care will be £86,000, while the asset floor below which you need to fall is £100,000.

“From next April, we will create a new UK-wide 1.25% health and social care levy on earned income, hypothecated in law, to go to health and social care with dividend rates increasing by the same amount," Boris Johnson announced in the Commons.

“This will raise almost £36billion over the next three years, with money from the levy going directly to health and social care across the whole of our United Kingdom.

“This won't be paying for a pay awards for middle management, it will go straight to the front line at a time when we need to get more out of our health and social care system than ever before.”

But the government's own figures reveal just over £5billion of the extra revenue will go towards adult social care, with the vast majority going to the NHS. Those who earn more will pay more, with a typical basic rate taxpayer earning £24,100 will contribute an extra £180 a year, or £3.46 a week. A higher rate tax payer on a salary of £67,100 – the top 15% of earners – will contribute £715 a year to the new fund. Additional rate taxpayers make up only 2% of individuals effected, but will contribute nearly 20% of the revenue raised. The rate of dividend tax will also be raised by 1.25% to make sure those who get their incomes through dividends make the same contribution as the employed and self employed.

As well as employees paying an extra 1.25%, which includes those of state pension age, who do not currently pay National Insurance, employers will also have to pay additional contributions, which the government says is “reasonable” because they benefit from a healthy work force and the NHS. They believe this makes National Insurance the best vehicle to raise the money, rather than income tax, because businesses do not have to pay under that system. Big businesses will pay the most, with 70% of the money raised from firms which with 250 or more employees, with smaller companies paying less, while 40% of all businesses won’t pay anything extra.

Johnson told MPs: “Some will ask why we don't increase income tax or capital gains tax instead, but income tax isn't paid by businesses. So the whole burden would fall on individuals, roughly doubling the amount that the basic taxpayer could expect to pay, and the total revenue from capital gains tax amounts to less than £9billion this year.

“Instead we argue that we will share the cost between individuals and businesses, and everyone will contribute according to their needs, including those above state pension age, so those who earn more, will pay more. And because we are also increasing dividends tax rate, we will be asking business owners and investors to make a fair contribution too. In fact, the highest earning 14% will pay around half the revenues, and no one earning less than £9,568 will pay a penny, and the majority of small businesses will be protected, with 40% of all businesses, paying nothing at all.”

Explaining how the cap on costs and floor on assets will work, Johnson explained: "From October 2023 no one starting care will pay more than £86,000 over their lifetime, and no one with assets less than £20,000 will have to make any contribution from their savings or housing wealth – that’s up from £14,000 today. Meanwhile, anyone with assets between £20,000 and £100,000 pounds will be eligible for some means-tested support. This new upper capital limit of £100,000 is more than four times the current limit, helping many more people with modest assets.”

Ahead of his announcement Johnson visited a care home in East London this morning, before presenting his plan to Cabinet for a final sign off before heading to Parliament. He began by saying how much the extra cash is needed to help the NHS deal with the fallout from the pandemic.

“We not only have to pay for the operations and treatments that people decided not to have during the pandemic, we need to pay good wages for the 50,000 nurses who would enable that treatment,” the PM said. “Who can help us tackle the waiting list, which could otherwise expand to 13 million over the next few years, we need to now go beyond the record funding we have provided, and we need to go further than the 48 hospitals and 50 million more GP appointments that are already in our plan. So today we are beginning the biggest catch up programme in NHS history, tackling the Covid backlogs, by increasing hospital capacity to 110% and enabling nine million more appointments scans and operations.”

But responding in the Commons the Labour leader Sir Keir Starmer said the Tories can “never again claim to be the party of low tax”. He demanded to know if the PM's new plan for social care will still lead to people selling their homes to fund care, asking: "Under these proposals, people will still pay substantial costs and I heard what the Prime Minster said, so another direct question for him. Can the Prime Minister guarantee that under his plan no-one will have to sell their home to fund their care – yes or no?"

He added: "Social care is about so much more than this. The blunt and uncomfortable truth is that under the Prime Minister's plans the quality of care received will not improve - there is no plan for that.”

Starmer said using Covid-19 as a reason for having to raise so much extra funding for the NHS "is not going to wash. The pandemic has undoubtedly placed the NHS under huge strain, but that is only part of the story," he added.

“A decade of Conservative neglect weakened the NHS. Waiting lists had spiralled up two million before the pandemic, targets were missed on cancer, on A&E, on mental health before the pandemic. The same is true on social care – £8billion cut despite growing demand before the pandemic, carers on poverty wages without secure contracts before the pandemic."

© Alain Tolhurst and Kate Proctor / Politics Home 2021