Social Care Levy – not quite what it seems.

The funding crises for the Social Care sector has been resolved for the foreseeable future according to the recent statements coming from government with a new 1.25% levy on earned income. This increased funding we are told is initially for the NHS and in subsequent years will help fund social care meaning families can feel reassured over the future care for their loved ones without selling their family homes.

All is not as it seems when the detail is examined. Firstly the 1.25% levy will be ring fenced (hypothecated) by law. Whilst true completely misleading in the message it sends – no other funding for the NHS or social care is ring fenced. This means that on present estimates no less than £12 billion a year will be spent on the NHS and social care. Given the current Department of Health and Social cares core funding is approximately £160 billion with an additional £22billion Covid funding the overall funding is never at risk of falling below £12billion.

As such the core funding is not guaranteed and will vary annually depending on levels of austerity or largesse of the then government. Given the state of the public finances it can be cut either in absolute or real terms at any future budget. The 1.25% is in simple terms a tax rise that means the funds can be used anywhere as long as at least £12billion is spent on Health and Social care (A classic example of fungibility e.g. earmark £12billion from the levy and reduce core budget to free up spending elsewhere).

Secondly the safeguarding of individual’s lifetime care costs does not include accommodation and food. The extra funding will be accompanied by a safeguarding on individual’s lifetime care costs. These are capped at £86,000 over the lifetime of an individual. This cap applies only to care costs, accommodation and food is the majority costs of residing in a care home. These will continue to be paid out of income/asset sales without a cap until assets have fallen below £100,000 at which point care and other costs will not diminish capital by more than 20% a year until savings and assets reach £20,000 after which all costs will be covered by the state. So, yes it will mean assets decrease at a much slower rate, but £86,000 of care costs will take a significant time to reach and accommodation and food costs will continue to diminish assets. It increases, on average, the assets that can be passed on particularly in areas of high asset (home) values.

Thirdly it will not solve the problems of having to change care homes in later life or continued partial funding. The calculation of what is allowable will be set by the Local Authority based on its own assumption of costs. In Scotland care home costs for this year are deemed to be £600 p.w. in a council care home, any costs above this level will not be covered by the new arrangements so many residents will need to move to low cost care/nursing homes to comply with the L.A. cap.
Fourthly, for care at home, the LA association has confirmed that eligibility criteria will remain the same as now. It will be interesting to see if the local authorities raise their care charges as there is no cap on the levels currently required. For low income areas this will now be covered by the meaning that there is no detrimental impact on low income families, but will release funds for local authorities to use elsewhere (fungibility again), but will mean diminishing assets more quickly for others.

Finally we are told that the levy is progressive, again this depends on the income range being examined. Because of the way that National Insurance works before it starts being paid at the lower income levels the tax can be regarded as progressive. Once we move into the higher income ranges the levy becomes regressive (Progressive taxes mean that the higher the income the higher the proportion of that income is given in tax).

In summary the ring fencing of a very small proportion of a budget is political window dressing with no practical implications on where the money is spent. The safeguards on individual costs will not impact on support given to families immediately and will take a few years before any reduction in asset sales to fund social care manifests itself to a significant level. In the medium and longer term it will slow down the asset disposals of individuals to fund care, but will not stop it. The decision on where governments spend money is always a political one, and this is no different. The decision has been made that the overall spending decisions are not currently fiscally sustainable and so a tax rise has been introduced.

One worrying factor is that this has been announced outside of the budget, which means the claims and analysis of impact that accompanies budget statements carried out and published by the Office of Budget responsibility has not been done reducing parliamentary and public scrutiny of the impact on individuals, the economy and public finances.

Fred Mear:
Associate Professor in Accounting and Finance
Module lead in Public Sector Accounting and Finance.