Niki Patel examines planning possibilities around the reformed Health and Social Care Levy
In July 2011, the Dilnot Commission was set up by then Prime Minister David Cameron’s coalition government and was tasked with making recommendations for changes to the funding of care and support in England. It published proposals on 4 July 2011, and, among other things, recommended a lifetime cap on personal care costs of £35,000 for those aged 65 plus, and a more generous social care means test. The coalition government accepted the proposals in principle, although it altered the parameters for the cap, setting it at £72,000.
The measures for reform made by the Dilnot Commission are included in the Care Act 2014. The government initially set an implementation date of April 2016 for the reforms and, in April 2015, part one of the Act introduced the first of the reforms – a universal deferred payment arrangement and new national criteria to determine eligibility for care. The remaining changes however have been continually delayed – until now.
Reforming adult social care funding has been an issue for successive governments. For a number of years, the government has recognised that reform was needed quickly to support people using care services, as well as preparing better care for future users. Further, the Covid-19 pandemic has illuminated significant problems in the UK health and social care system, with millions of patients missing out on treatments.
As a result, on 7 September 2021, the government published Build Back Better. Our plan for health and social care, introducing a Health and Social Care Levy (HSC Levy) and, in March 2022, the government issued a policy paper entitled Adult social care charging reform: further details.
In this article, I specifically look at what the HSC Levy is and what these changes will mean for individuals going forward. I will also consider how these changes will affect profit extraction from owner-managed companies and look at some planning options that individuals could consider when funding for care.
HSC levy and dividend tax rates
The HSC Levy is estimated to raise £12bn a year and will be ringfenced to pay for the Build Back Better health and social care plan. It will initially be funded through increases in National Insurance Contributions (NICs) rates.
From 6 April 2022:
- The rates of Class 1 and Class 4 NIC have increased by 1.25%. Class 1 NIC applies to employers and employees; Class 4 NIC applies to the self-employed (including partners).
- The rates of income tax on dividends have increased by 1.25%, so the current dividend rates are 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).
From 6 April 2023:
- The NIC rates will reduce by 1.25%; and
- The 1.25% HSC Levy will be formally separated from NIC, so it will become its own tax with a separate line showing on payslips and self-assessment payments. It will also apply to those still working above state-pension age even though they do not currently pay NICs.
Scotland, Wales and Northern Ireland have their own care funding systems but, as NICs are not a devolved tax, their residents will have to pay the HSC Levy. It will be returned to the devolved nations via the usual allocation formulae.
Before I look at how health and social care funding will change, let’s consider what these changes will mean to those who wish to extract profits from their companies.
For those in control of how they distribute funds from their company, there are broadly three main ways to extract the funds – as salary, dividends or by making employer pension contributions.
In the government’s Spring Statement, it was announced that the starting point for paying Class 1 employee and Class 4 self-employed NICs will be aligned with the starting point for paying income tax – £12,570. However, this change does not come into effect until 6 July 2022.
The primary threshold for employees increases from £190 a week (£9,880 a year) from 6 April 2022 to £242 a week (equivalent to £12,570 annualised) from 6 July 2022. This means that for 2022/2023, £11,908 of earnings will be free of NICs for employees. For employees with earnings above £11,908, there will be a NIC saving of £269 in 2022/2023. From 6 April 2022, the secondary (employer NIC) threshold is £9,100 a year.
Before the change was announced, to provide a shareholding director with their immediate income needs, the company accountant would often suggest paying a minimal salary, perhaps up to the secondary earnings limit, with the rest in dividends. Although salary up to the primary threshold would not have suffered any employee NICs, it would have been subject to employer NICs.
In 2022/2023, the gap between the primary threshold and secondary threshold is £2,808 (£11,908 minus £9,100).
The figures below illustrate the 2022/2023 potential savings, assuming that:
- At least £11,908 of the personal allowance is available;
- A payment of £11,908 is made as salary only or as £9,100 salary (in line with the secondary threshold) with the balance as dividends from net profits; and
- The Employment Allowance (EA) is used against other employee earnings, or is otherwise unavailable.
If further funds are needed, however, then extracting by way of dividends will provide tax savings for the individual, given that the payment will not attract employer or employee NICs and lower rate(s) of income tax apply.
There are two key areas of planning where these changes make the advantages of pension planning even greater:
Employer pension contributions
The HSC Levy and the increase in dividend tax rates both make the extraction of profits via pension contributions more attractive.
When considering making employer pension contributions, advisers will usually be comparing paying further dividends with employer pension contributions at the director’s marginal rate of tax.
Any further dividend payments will effectively result in additional corporation tax (because dividends are paid out of after-tax profits) and the higher dividend tax rates (assuming the tax-free dividend allowance has already been used up) of 8.75%, 33.75% and 39.35%.
In contrast, a pension contribution can be made gross, and, providing it meets the usual “wholly and exclusively” rules, will be treated as a business expense. There will, of course, be tax when the pension is paid, but 25% of this is normally paid free of tax and the rest subject to income tax at the recipient’s marginal rates of tax.
Examples – tax year 2022/2023
Consider a shareholding director with £10,000 of funds to distribute, assuming they are and remain a basic rate taxpayer and the dividend allowance has already been used.
For simplicity, the examples have assumed no growth on investment of either the pension or extracted funds.
The pension has a clear advantage for both basic and higher rate taxpayers. Where the client is a higher rate taxpayer when the payment is made, but becomes a basic rate taxpayer in retirement, the benefits of the pension are even greater, i.e. they could receive £5,366.25 as a dividend now or an after-tax pension payment of £8,500 in retirement.
The pension will become even more favourable for companies from 1 April 2023, when the corporation tax rate increases to 25%, unless they are subject to the small profits rate, which will be maintained at 19%.
Employees can sacrifice part of their salary and/or bonus in return for their employer paying the amount sacrificed as an employer pension contribution on their behalf. Unlike salary/bonus, an employer pension contribution does not attract NIC.
The increases have no impact on those making personal pension contributions, either personally or via their employer. There are no NIC savings to be made on these and this will be the same in respect of the HSC Levy.
However, the HSC Levy makes salary sacrifice more attractive. As many employers and employees are already aware, there can be significant advantages where the employer operates a salary sacrifice scheme, allowing personal contributions to be converted to an employer contribution by exchanging salary for pensions. The additional benefit of this is the NIC savings for both employer and employee, made by reducing salary. Employers make their own decisions of how much of the NIC saving they pass onto their employees, with some passing all and some nothing at all. However, even if none, the employee will still benefit from their employee NIC savings.
The benefits of salary sacrifice from 2022/2023 onwards will be even greater. For employees, they will save an additional 1.25% on any of their earnings they choose to give up. Employers will save the same and may be willing to pass some or all of this onto the employee. This may lead to an increase in contributions via salary sacrifice and more employers wanting to set up salary sacrifice arrangements.
The government largely withdrew the income tax and NIC advantages where benefits in kind are provided through salary sacrifice arrangements (described in the legislation as “optional remuneration arrangements”) from 6 April 2017. However, pension contributions were exempted from that change.
The significant advantage may cause the government to take another look at salary sacrifice arrangements, especially from next year where the tax becomes a separate charge, i.e. the HSC Levy.
How will funding change?
The new funding will mean that as of October 2023, the government will introduce a new £86,000 cap on the amount anyone in England will need to spend on their personal care in their lifetime. The term ‘personal care costs’ refers only to the components of any care package considered to be related to personal care, not hotel and accommodation costs.
The cap will not cover the daily living costs for people in care homes, which means that individuals will remain responsible for their daily living costs, like rent, food and utility bills, throughout their care journey, including after they reach the cap. For simplicity, these costs will be set at a national, notional amount, the equivalent of £200 per week at 2021/2022 prices.
Costs accrued before October 2023 will not count towards the cap. To enable this, the local authority in whose area the person is ordinarily resident will start a care account, which is personalised to the individual and will monitor their progress towards the cap.
Approaching and reaching the cap
When an individual reaches the cap, the local authority becomes responsible for meeting the person’s eligible care and support needs, and for paying the cost of the care needed to meet those needs. This means that the local authority will have to notify the individual in advance of reaching the cap and provide them with information for when they reach the cap. The local authority will also need to work with the individual and agree how they would like their needs to be met when the cap is reached.
Once the cap has been reached, the person will continue to remain responsible for meeting or contributing to their daily living costs and any top-up payments they have chosen to make. It will be the responsibility of the local authority to inform the person that they have reached the cap.
The extended means test
The means test for financial support will continue to work in the same way as it does currently, however, the upper capital limit, the point at which people become eligible to receive some financial support from their local authority, will increase to £100,000 from the current £23,250. As a result, people with less than £100,000 of chargeable assets will never contribute more than 20% of these assets per year.
The lower capital limit, the threshold below which people will not have to pay anything for their care from their assets, will increase to £20,000 from £14,250.
It is arguable that the new cap on care costs will provide some certainty for those entering care in England from 2023. Further, the higher means test limit will, of course, mean more people will be eligible for some financial support. Regardless of this, it is advisable for those who will need or are likely to need care in the future to consider planning options in advance.
Planning for care costs
The cost of care will undoubtedly differ depending on the type of home, type of care and location. A good starting point when considering planning for fees is to consider all of these aspects to help determine what the likely costs could amount to and begin putting a savings plan in place to help meet future costs of care.
Lasting Power of Attorney
Arranging a Lasting Power of Attorney – one for financial affairs and one for health and welfare – will be vital. This enables individuals to appoint someone they trust to manage and look after their affairs when they are in a position where they cannot do it themselves. When it comes to care, an attorney will be able to advocate with social services and other authorities to ensure everything is in line with the wishes of the donor.
There are certain types of trusts that can be set up in-lifetime to help mitigate inheritance tax, where planning in this area is of concern, but also enable access for the donor/settlor. So, for example, a discounted gift and income trust can be used where the individual requires access to set amounts, usually on a monthly/quarterly/annual basis. Under this type of arrangement, regular predetermined amounts are paid to the donor/settlor and they can then use the funds to pay towards funding care fees.
An alternative option that could be considered is a loan trust. Under this type of arrangement, it is usual for the donor/settlor to make an interest-free cash loan to trustees, which is repayable on demand. The trustees would invest the funds. However, they have the ability to make loan repayments on an ad hoc basis whenever funds are required. This means that it is possible for the donor to have access to the amount lent to help pay for care fees.
In addition, some providers offer specific long-term care plans where the donor/settlor may become entitled to payments, depending on whether they meet certain criteria in the future. This type of arrangement can provide some certainty for the donor/settlor if they believe they may satisfy the criteria and require additional funds for care fees in the future.
Individual Savings Accounts
Individual Savings Accounts (ISAs) are a tax-efficient savings option for all individuals. There are four types of ISAs available – a cash ISA, stocks and shares ISA, innovative finance ISA and a lifetime ISA. Under current rules, it is possible for adults to subscribe up to £20,000 in one type of account or split the allowance across some or all of the other types. (Note that an individual can only pay £4,000 into a lifetime ISA in a tax year and that £4,000 limit counts towards the £20,000 overall limit).
Any withdrawals from the account are tax-free and therefore provide a flexible option for individuals to use funds from their ISAs to help contribute towards their care costs.
Under the Care and Support Statutory Guidance, which supplements the Care and Support (Charging and Assessment of Resources) Regulations 2014, the surrender value of a life insurance policy is currently disregarded as capital provided there has not been deliberate depravation for the purposes of the means test. Single premium investment bonds will usually be treated as policies of life insurance for these purposes. It should be noted that investment bonds that have no element of life cover, such as capital redemption bonds, would not be disregarded and their full surrender value would be included as capital.
The taxation structure of a bond may also be particularly favourable, especially if the investor can use accumulated 5% allowances to pay for any fees if required.
Generally, even though it is possible for clients to set up trusts and even make gifts, they should be wary that any planning they carry out should not fall foul of the deliberate deprivation rules. Broadly, if someone intentionally (i.e. with the intention of avoiding paying care fees) gifts a lump sum, uses chargeable assets to invest in a non-chargeable asset, such as a single premium investment bond, or transfers the title deeds of their property to someone else, a local authority can look at whether they have done this to avoid paying a contribution towards social care fees. If the local authority concludes this has taken place, it has powers to treat the individual as if they still possess the assets/original assets – this means they would still include the value of those assets when carrying out any means test assessment.
This article provides a general overview of the changes that are due to come into force and outlines some of the planning opportunities that could be considered. It is inevitable that planning in this area is likely to become more popular for many individuals, who ought to seek advice early to consider the options available to them.
Niki Patel is a tax and trust specialist at Technical Connection