Social care funding reform - how will the changes affect you?

The question of how to fund social care is one that has dogged politicians of all parties for decades. Back in July 2019, the Prime Minister said “we will fix the crisis in social care once and for all, and with a clear plan we have prepared…”. On Tuesday 7 September 2021, details of that plan were finally, and also very quickly, announced. 

The reforms will use the existing framework of the Care Act 2014, based on a set of proposals put forward in the Dilnot report on social care a decade ago now. However, the new reforms will only apply to social care in England, as Wales, Northern Ireland and Scotland have their own care schemes and funding mechanisms. The main changes affect those commencing care from October 2023:

Capital means-testing

The current English system requires anyone with capital of over £23,250 to fund all their care costs. The value of an individual’s home is generally counted towards the capital means test unless occupied by a partner, dependant, or relative aged at least 60. The new rules raise the cap for full fee payment to £100,000.

At the lower end of the capital means test, there is currently no requirement to use any savings to help meet care fees if wealth is below £14,250 (although there may still be an income-based means-tested contribution). This limit will rise to £20,000.

Between the upper and lower capital limits there is currently an ‘income tariff’ contribution of £1 a week for each £250 (or part thereof) of capital above £14,250, an effective rate of 20.8%. The new regime will continue to have an income tariff between the new limits of £20,000 and £100,000. The government’s paper says that this will be levied at “no more than 20 per cent”, which points to little if any change. At worst, it implies a contribution of £16,000 a year for someone with capital just below the new £100,000 ceiling.

Total fees cap

Currently there is no direct cap on the total amount that an individual can be required to pay for their care. For those entering care from October 2023, there will be a new fee cap, set at £86,000 initially (against £72,000 envisaged alongside the Care Act 2014). The cap will only apply to the costs of personal care, not accommodation charges (sometimes referred to as ‘hotel’ costs).

The Care Act 2014 based the personal care cost ceiling on the fees that would be paid by the relevant local authority, which are typically less than self-funders charged by their care providers. The Government says existing Care Act legislation will be used to “ensure that self-funders are able to ask their local authority to arrange their care for them so that they can find better value care”.

NHS-funded Nursing Care (FNC)

Currently, an individual’s care/nursing home is directly paid £187.60 a week to meet the cost of care from registered nurses. This is not means-tested and it appears that this payment will continue after October 2023. Full care costs are met under the NHS Continuing Healthcare (CHC) provisions, but these set highly restricted circumstances for payment.

Meeting the cost

The Institute for Fiscal Studies (IFS) described the measures to meet the proposed costs of the reform as “a Budget in all but name”. The amount raised, which the IFS puts at
£14 billion a year, will be directed mainly at dealing with the NHS’s Covid related issues until the new care provisions start to operate in two years with two increases, which many have referred to as a “tax on jobs” due to fund those costs.

The “tax on jobs” reference comes as the bulk of the cost will be met by increasing National Insurance Contributions (NICs).

In 2022/23 a new 1.25% Health and Social Care Levy (HSCL) applies, an increase on Class 1 (employer and employee) and Class 4 main and higher NIC rates. Class 2 (self-employed) flat-rate payments will be unaffected.

In 2023/24 NIC rates will return to 2021/22 levels and the HSCL will reappear as a separate 1.25% charge. This separation is necessary to allow the HSCL to be charged on the earnings of employees and the self-employed who are over the State Pension Age (SPA) – currently 66. (At present employees and the self-employed past SPA do not pay NICs, although employers generally pay Class 1 NICs regardless of employee age).

The current employer NIC reliefs, e.g. for apprentices under 25, will continue to apply.

Dividends

From 2022/23, all dividend tax rates will also rise by 1.25%. This is designed to discourage private company owners from drawing remuneration as NIC-free dividends. Including dividends perhaps also has the political benefit of raising some additional revenue from the wealthy retired, who pay no NICs.

NICs and dividends were likely chosen to fund the social care reform because, unlike income tax on earnings, they are not devolved taxes. As a result, residents of Wales, Northern Ireland and Scotland will suffer increased tax bills for a reform currently limited to England. However, revenues will also be returned to the devolved nations’ health and social care services (not the devolved governments) via the Barnett formula.