Share and dividend income tax by 1.25% to “ask better of business owners and investors to make a fair contribution”, according to Prime Minister Boris Johnson in a speech to the House of Commons.
Addressing MPs in the House of Commons this afternoon, the Prime Minister said that National Insurance will rise 1.25% to include a new health and social care levy in order to “share the cost between businesses and individuals”.
Workers of pension age who are still in employment will also have to pay the new health and social care levy levy, despite being exempt from National Insurance payments after reaching state pension age.
The tax rise to find social care proposals breaks the Conservative party’s manifesto promise from the last General Election.
For those entering care from October 2023, no-one will pay more than £86,000 on social care over their lifetime. The Government will step in and pay any social care bills beyond this cap. The Prime Minister also said that he is working with the financial services industry to allow people to insure themselves up to the £86,000 cap.
There will be a floor of £100,000 in assets.
Anyone with assets under £20,000 will have their care funded by the Government in full. This is similar to the current provision where those with assets of less than £23,250 are supported by the Government for their social care costs.
Those with assets between £20,000 and £80,000 will be “eligible for some means tested support”.
Financial Planners have told Financial Planning today that whilst there is clearly a need for social care reform, they are disappointed with the Prime Minister's announcement today.
Keith Churchouse, Chartered Financial Planner at Chapters Financial said whilst there is a clear need to fund social care, he does not feel that National Insurance was the right vehicle for the funding.
He said: "There is no denying that there clearly is a need to fund additional care costs and action is long overdue. Many will know of the void in funding that has been growing over the years and has been somewhat exposed by the pandemic.
"Although the devil will of course be in the detail, it is good to hear that these costs will feature separately on pay slips. However, and this is a big however, national insurance was not the right vehicle, placing greater burden on workers and invariably the younger demographic. I am disappointed by this main announcement. Tax on dividends seems to be a nod to this position, but not a change of real substance."
Martin Bamford, Chartered Financial Planner at Informed Choice, said he is "very disappointed" in the policy announcement which announced a seemingly overly complex approach to social care reform.
He said: "That was an unclear, unnecessarily ambiguous policy announcement, with the majority of the detail left to be seen. It feels like a rushed and poorly considered decision. The introduction of a lifetime cap will benefit relatively few people who need care and will create an administrative nightmare for local authorities. Tapering means tested support between £20,000 and £100,000 of eligible assets is also an incredibly complex approach. There were no answers about an investment in the social care sector, which is much needed, and no strategy for creating additional capacity in the NHS."
Shaun Moore, tax and Financial Planning expert at Quilter, warned that the increase in dividend tax highlights the need for investors to make sure they are maximising the tax efficient vehicles available to them.
He said: "While the young will still face a rise in national insurance, it has been decided that dividends is the way forward and one method of taxing wealth on the older generations.
"With bond yields and interest rates showing no sign of rising, investors and retirees have come to rely heavily on dividends to receive their income. As such, there is nowhere to turn for this group from this tax levy unless they invest smartly in tax efficient savings vehicles such as ISAs and pensions.
"This policy, however, has wider ramifications and could have a huge knock-on effect on the entrepreneurial spirit of the nation. There are hundreds of thousands of directors of limited companies who pay themselves an income through dividends. This is a group that were locked out of any financial support during the pandemic and are now facing the double whammy of seeing their income hit just as the recovery takes shape and they try to find their feet once again. Landlords also won’t face any additional tax hikes from the new levy.
"For those looking for a tax efficient income, particularly in retirement, the options have become pensions or property as the government has not yet decided to go after this wealth, yet."
Some were more positive about the announcement from the Prime Minister.
Chartered Financial Planner-body, The Personal Finance Society (PFS), has welcomed the announcement from the Prime Minister saying a "solution to fix the care funding crisis was kicked into the long grass by past governments resulting in far too many people’s lifetime savings being obliterated by their care needs" but said there are a lot of questions that need to be answered before April.
Matthew Connell, director of public and policy affairs at the PFS, said: "National insurance already provides protection for unemployment, the state pension and healthcare so it has clearly been identified as the simplest and quickest way for social care to be funded via this tax. However while we’ve seen the invoice for fixing care we are still in the dark about how exactly it’s going to get fixed.
"This is far from a perfect care funding solution for all as the new cap on the cost of social care only reduces the risk that some people will have to sell their homes to pay for care. Today’s announcement focuses on funding but we also need to know what this cash will provide as there are issues with the availability and accessibility of different types of care.
"We must all still engage in conversations sooner rather than later about the kind of care we hope to receive and wealth we may wish to pass on. We will still need to financially plan to achieve our own life goals rather than rely on the government’s plan to deliver that.
"We also welcome and look forward to the opportunity to work with the government on ways the financial services profession can insure individuals up to the care funding cap."
Alastair Black, head of industry change at investment provider abrdn, said the Government's announcement on the funding of long term care should help Financial Planners by raising confidence in long term care planning.
He said: "While the decision to press ahead with the National Insurance levy may not be popular with everyone, at least it gives us some certainty.
"There is no doubt this announcement is a good thing for advisers and their clients as a clear commitment to tax funding will give them confidence for the first time that long term care planning will become more straightforward with tax parameters and personal expectations clearly known. This will help conversations with clients with the future prospect of long term care becoming an integral part of a financial plan."
Wealth management trade body PIMFA welcomed the Government proposals for social care and has called on the Government to consult with wealth managers and Financial Planners to explore how more people can access financial advice to help them navigate the costs in later life care.
Tim Fassam, director of government relations and policy at PIMFA, said: "Obviously, no proposal put forward will be perfect. Most people are reluctant to think about the final stages of their life and therefore put off planning for it. But the need to plan for social care is increasingly an issue that financial advisers and wealth managers are helping existing and new clients with and those that receive advice early are likely to find they are more comfortable in later life.
"The Government and the Regulator should recognise the unique role that the financial advice and wealth management industry are playing in addressing the UK’s care crisis. We would urge the Government and the Regulator to work closely with us and this industry to explore ways in which far more people can access financial advice in a cost-effective manner to help them prepare for the potential challenges of later life and safeguard their financial and mental wellbeing."
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