National Insurance and Social Care Rip Off

I have been trying to avoid writing about tax or anything tax related. Unfortunately that is about to change.

Tuesday this week was the date of a planned announcement by the Government on how they will deal with social care in England.

People are living longer than ever. And many are not physically or mentally well enough to care for themselves. This is a massive problem. If a pensioner with dementia cannot look after themselves, what we going to do? Let them rot somewhere? Probably not, but putting them into a care home costs money and that needs to be paid for by someone.

On Sunday the Government started leaking the news that the PM will announce an increase in National Insurance (NIC). This created noise and disquiet from Tory MPs who felt that an increase in NIC was the wrong way to do it.

Watching this build up made me suspicious. Why leak information that will so obviously create negativity? I started to suspect that it was because they wanted to create a feel good factor for the eventual (bad) news, by changing from the leaked news to the actual news, and this is exactly what happened.

On Tuesday 7th September 2021 the Government did announce an increase in NIC but that it would be changed after a year to a new tax "calculated the same way as NIC".

So everyone can feel good, because its not a rise in NIC which Tory MPs were getting unhappy about, thats only happening for 1 year, after that its changing to a tax thats the same as NIC. So what is generally seen as bad news, a tax rise, is seen as good news, because its not the thing everyone was getting upset about.

NIC is NOT the NHS

The reason the Government picked NIC is because in their polling of public opinion people supported a rise in National Insurance, but are less keen on an increase in tax.

This is not because people understand tax or NIC, but because of what they feel about tax and National Insurance.

People perceive increases in tax as something that is negative. People associate National Insurance with the NHS, they think; NIC funds the NHS therefore its worth paying and its okay paying extra.

This is completely wrong. Eligibility to treatment under the NHS is based on being a resident in the U.K. Basically you're born British, or you live here legally for 6 months, and that's it you get NHS treatment, there is no system you're paying into to earn your right to medical care.

Pensioners Won’t Pay

The National Insurance that we are talking about here is actually, Class 1 National Insurance. This is paid by people who EARN over a certain amount, say £10,000.

I say EARN, is because Class 1 NIC is payable by employees and employers on the money they earn from their employment.

Employees pay a %, say 10%, on earnings over £10,000 up to a limit, lets say that's £50,000. Employers pay a %, say 13%, without any limit.

Pensioners pay nothing on their pension.

Extra money is coming from employers, on one hand that seems good. This additional charge will make a small dent in the pocket of Apple and Facebook, but only a small amount as they don't need to employ that many people in the UK to make their £Billions.

It affects large employers more, so the NHS, the military, the crime and justice systems and rail companies (who can pass that cost on via ridiculous fare increases) will pay much more than the tech firms.

Amazon will pay a bit more as it employs warehouse workers, but as many zero hour workers aren’t given enough hours to live off they will be earning less than £10,000 so it will not increase Amazon's costs for those workers at all, but John Lewis and New Look have large payrolls so thats a nice whack to the high street, another cost Amazon can beat them on.

As an employee, to pay NIC you have to be over the age of 16 and under the retirement age, lets say thats 65 even though no one working today will be well off enough to actually stop working at this age.

Retirement, as a concept which ended your employment, was abolished in the UK over 5 years ago. This means that employers can no longer legally bring your employment to an end when you reach 65. If you want to carry on working you can no longer have your employment ended legally and automatically due to hitting retirement age.

What this means is that the older workforce can continue in employment beyond 65, beyond the point at which they pay Class 1 National Insurance, still earning their salary, but no longer having to pay the 10% employees NIC on their pay. A pretty significant increase in Net Pay for most people at this point.

In addition, NIC is not paid by pension funds or taken from pensions. So the people most in need of social care won’t pay for it at all via this route. Perhaps this new charge should be applied to pensions. But even then, the pension funds won’t be paying the 13% Employers National Insurance as an employer would, unless you reduce the pension investments and therefore pensions paid, and that will never happen!

This means that National Insurance is more focused on younger workers, exactly the generation of people who are already carrying the burden of paying for their education (something previous workers didn’t have to do unless out of choice), with the standard of free healthcare eroding due to funding cuts, a housing shortage and exploding house prices (partly caused by banks becoming landlords) and a country that headed into a pandemic straddled with massive debt from a banking crisis from a sector which remains unregulated, still paying staggering bonuses, while ordinary people, and public services like the NHS has been subjected to austerity policies, the impact of which is that the NHS cannot cope with a spike in seasonal flu, let alone anything else.

Fairer Burden

The Government could have increased tax.

Tax is paid by anyone who earns over £10,000 of any age. If a baby appeared in the John Lewis Christmas advert and got paid £50,000, they pay tax on that money. If a 100 year old person does a job and earns over £10,000 or has a £40,000 a year pension, they pay tax, the same as everyone in between.

Tax is paid on pensions. Tax is paid on income from 2nd properties. Tax is paid on gains from share options. Tax is paid on capital gains. The Government could have increased tax, it would be so much fairer, but it would hit their older and wealthier voters, so perhaps we can see why they avoided that route.

Boomers v Millennials

To show you the financial impact of this change, lets compare a Boomer, Kevin, who is just turning 65 with a Millennial, Poppy who has at least another 20 years until that age.

Both are doing well and earning above average pay, lets say £40,000. A few years ago Kevin would have had to retire freeing up that job for a younger person, but he no longer has to, (so now he can increase the youth unemployment numbers and the cost of the unemployed) and he can keep working while also claiming his State Pension (paid out of general taxation).

Lets assume that when people talk about Kevin and Poppy they say that they're not higher rate taxpayers, so they don't pay 40% tax on their income, but they both pay 20%. As with all UK employees who are paid at this level, they have been forced into a pension scheme because the Government can no longer afford the State Pension so they are shifting this burden to the younger working generation who have to pay into a pension as well as fund the taxation paying todays triple locked pensions to current pensioners.

Kevin has just bought a second home which he can let out to create some income for when he eventually retires, so he opted out of the company pension scheme having got a decent final salary pension scheme from a previous job (final salary pension scheme commitments reduce the money available to pay the younger workers left in employment by that company).

When I did my calculations, I subjected every £ to tax or National Insurance, I did not give them £10,000 tax or NIC free, it wouldn't change the numbers much and the comparative difference would be the same. And while a pension is not quite a tax as it goes into an investment that Poppy will eventually get back (if she can avoid death from climate disasters or stress from over work) its a deduction forced on an her by the Government which was never the case for the final salary Boomer generation. So I have lumped it in as a tax as its lowering Poppy's take home pay, reducing her ability to buy a house, reducing the amount she can spend or get a mortgage for.

Poppy thinks shes a 20% taxpayer and she is. But when everything else is added in shes losing nearly half her income. Kevin is much better off and gets even more well off now he can stay working beyond his retirement age in June when his NIC deductions stop.

If we increase National Insurance by 1%, as the Government is doing, or implementing a "charge like National Insurance" the numbers are:

You can see that even as we increased National Insurance by 1% Boomer Kevin won’t be affected at all. It would only be the younger workers who have the overall burden of taxation increased.

Neither are as well off as Amazon as we saw from the headlines on Wednesday:

I make that an average tax rate of 2% on their income, combined with a huge increase in income made during a pandemic where people were locked in by law and could only have things delivered. There is always good money to be made from death and suffering. Nothing to do with Amazon's entrepreneurial brilliance just exploitation of a global pandemic. That's the market for you.

Partners and Turkeys

But it’s not just employees aged over 65 or pensioners who won't be paying this new charge.

Self employed people, like Partners of Big 4 Accountancy and Consultancy firms, large law firms, partners of hedge funds are not employees, and therefore they do not pay Class 1 NIC either, so no employers or employees NIC is payable on the money they receive.

How has the pandemic treated them? Have they lost everything and ended up on furlough then out of work?

They did well during the pandemic didn't they!

A massive increase in fees by vacuuming up £Billions of our money given away by the Government for things like track and trace (that great success!) An incredible shifting of wealth from our pockets to the pockets of the rich. Plus a massive decrease in costs as their lavish travel budgets went mostly unused.

If you compare 2 highly paid people, both of whom can afford to pay towards looking after a pensioner with dementia, 1 is a Director of a company, the other a partner in an accountancy firm, both are paid £750k, with Class 1 Employers NIC payable on everything over £10,000 at 13%.

The employer of the Director pays £96,200 in National Insurance.

The partnership to which the partner belongs, pays £0.

An increase in Class 1 NIC does not increase the costs on larger partnership incomes at all.

Remember that Rishi Sunak used to be a Partner in an LLP when he worked at a hedge fund, and the Treasury takes all of its advice on which taxes to increase and how to apply them from the Big 4 accountancy firms.

These turkeys don’t vote for Christmas.

Who Else Won't Pay?

In addition to Class 1 NIC not being paid by the self employed, pensioners or the older employee, its also not paid by landowners and those who make their money from sale of assets.

Asset owners such as shareholders who get an income from dividends, those who make capital gains on selling their assets, and those who receive income or gains from 2nd homes, they are not affected by this charge. People such as this are those in the wealthier bracket and in many cases, are older, they pay nothing extra.

Abandon All Hope?

If the Government is clever, they will ensure that the new tax applies to all of these forms of wealth, not just on the income earnt by younger people. But given that they’ve said the new tax will “be calculated like NIC“ and given that they know people are more supportive of an increase in NIC than tax, I won’t hold my breath.

Lets remember what this change is for, it will help an older person with a house, keep some of that equity to reduce the cost of their social care. But they will only keep some of the equity. So even with these changes, some people who may be hoping for an inheritance as a way of transferring wealth from one generation to the next will still lose out as the value in houses passes to the large private equity funds who own many of the nursing homes that have sprung up in the last few years just waiting for this little gold mine to start paying dividends.

And on Thursday we learned that step 2 in this plan, after raising money via this new charge, is to recruit 42 Chief Executives. Average pay £220,000 - £270,000. Good grief. Take from the young, give to the wealthy, like some kind of perverted Robin Hood.

Wrong About Everything, All of the Time

The generational divide in wealth inequality in this country is already at a level where it is tearing at the fabric of society and this is dangerous, this change is unfair and its not focused on those who can most afford it or those who will most immediately benefit from it.

The principle is fine. Increase taxes to pay for the fact that people are living longer and need care. But the people taking most of the burden as a result of this change are the wrong ones. Its being implemented wrong. It’s a mistake in its current form.