Health and Social Care Levy – comment from Alastair Wilson, Tax Partner

The Health and Social Care Levy is an imperfect solution to an unanswerable question, but there probably isn’t a better solution.

“Build Back Better: Our Plan for Health and Social Care” is the Government’s new plan for healthcare, adult social care and how to fund it. The key measure which has received the bulk of the commentary in the press has been the Health and Social Care Levy which will add an additional tax charge of 1.25% for employees, 1.25% for employers and 1.25% for recipients of dividend income.

How will it work?

In the design of the Health and Social Care Levy it can be seen that it is intended to largely mirror how National Insurance contributions work. In practice, it will simply be added as an additional NIC charge in the 2022/2023 tax year, after which a new Health and Social Care Levy line will appear on payslips.

However, it will have a different title. Some commentators have queried why not add the levy to National Insurance or Income Tax. Personally, I think that the different title and different mechanism will have the psychological effect that means it remains in place as a distinct levy unless replaced with something equivalent,and future Governments will have to reduce income tax alone if they want to reduce the overall burden of personal taxation.

Criticisms

A lot of the criticism from a tax perspective has arisen from the choice to use a NIC based approach rather than income tax based approach. Income tax does tax a wider group of persons than the NIC system does and so there will be persons who will not be impacted upon by the Health and Social Care Levy who again are seen as being in the “asset rich” category (for example, landlords). Once the levy exists as a separate tax, then it would be possible to expand the remit if needed.

However, in terms of answering the question “why” is this levy in place, as memories fade from the events of the pandemic, it will remain clearer “why” it exists compared to if it just merges into income tax. Governments of the future will face a very difficult political decision if they were to try to reduce or remove the levy. Equally, working taxpayers will be reminded that the levy exists to solve a particular issue rather than just being general taxation of their earnings.

The press have covered in some depth the irony that a “low tax” Conservative government now has created the highest tax burden for UK taxpayers since the Second World War. The obvious correlation is the level of National Debt the country has following the pandemic is also the highest since the Second World War.

The following quote is taken from the Office of National Statistics:

“The extra funding required to support government coronavirus (COVID- 19) support schemes combined with reduced cash receipts and a fall in gross domestic product (GDP) have all helped push general government gross debt as a ratio of GDP to more than 100% of GDP. This is around two and a half times higher than that at the end of the financial year ending March 2008, the year of the global financial crisis” (source UK government debt and deficit – Office for National Statistics (ons.gov.uk)).

Measures were taken following the financial crisis to limit the chances of such a crisis ever hitting the banking sector again, but that was a sector where those who should pay the cost were ultimately the shareholders or the customers.

With the cost of funding the NHS, the debt from the pandemic (and future needs for social care), the customers are and will be the population, and as the population inevitably grows and ages, so the cost of addressing the problem will increase. Following the financial crisis various Chancellors tried to reduce debt by austerity which proved both unpopular and also short sighted as one of the institutions which had spending curtailed was the NHS (and associated social care). So the healthcare sector was found to be poorly equipped for the unexpected in 2020, just as the banking sector was in 2008.

Why is this tax rise needed?

As a nation, the UK has increased its debt substantially through both a financial crisis (2008) and now a health crisis (2020 and ongoing). The Government have been using the national credit card to ensure that the impact of the pandemic has been mitigated, but its now time to start paying the bill.

It is also planning to ensure that lessons are learned and the same mistakes aren’t made in the future. A key emphasis of the measures, at least initially, is to fund the NHS and the need for additional funding on a consistent basis has been made clear by the pandemic.

It was announced that corporate tax will go up by 6% from 19% to 25% in 2023, so companies already know they will contribute to the cost of repairing the UK’s balance sheet. Now working individuals and the self employed are being asked to contribute too.

It is an inconvenient truth that the population is increasing, and the proportion who are living longer are too. Both of these facts are likely to remain true as healthcare improves. The cost of care and the numbers of persons needing it will continue to grow and so it is an issue that needed to be tackled, but politically the public are now more prepared to pay for it.

My conclusion

My view is that this is an imperfect solution to a problem which will never be solved but the alternatives are just as bad, and ignoring the problem is worse.

The real focus we should have with this new levy is not that it is brought in, rather that the taxpayer should be able to see how it is used to meet its objectives in a manner that delivers both the outcomes and also value for money.

What the taxpayer will be entitled to find unforgivable is that if the money raised does not demonstrably help to mitigate the problem.