What the social care plan really means for you

The week’s biggest news was the Prime Minister finally made his announcement on social care and it actually has significant planning implications. Given the enormous spending promises that this government has made so far, this was the first time we were given an indication on how they intended to pay for it.

The main points are:

  • From April 2022, National Insurance rates will increase by 1.25%
  • From April 2022, Dividend tax rates will increase by 1.25%
  • From October 2023, there is a cap on the cost of social care of £86,000 per person
  • State pension announcement – the triple lock has been suspended for this year, meaning state pensions will NOT rise 8.4% like average earnings have, and instead rise by either 2.5% or inflation, whichever is larger.

So what does this actually mean?

Well, taxes will go up and net pay will be lower for all workers. This means all employees, self-employed and limited company directors who take their pay in dividends.

The chart below from the BBC is useful to calculate how much:

No great surprise here, as given the enormous government spending over the last 18 months, it was simply a matter of when and how taxes would be raised rather than if they would.

National Insurance is simply another word (or two) for tax, so the government obviously felt it sounded better to increase this rather than the income tax bands.

It’s all the same however.

Is this the last of the tax raises we will see?

I think that depends on who wins the arguments between PM Johnson, who seems notably spend-happy, and Chancellor Sunak, who has expressed the importance of trying to balance the books. This will play out over the next few years.

To see how the funds raised are being spent, see the table below from the Guardian:

More money for the NHS plays well politically, and as I said above, I think we all expected taxes to rise in some way, so I think this will just be swallowed by the vast majority of voters.

State Pension not to get the large one-off increase

In regards to the other announcements, and this one was slightly brushed under the carpet, pensioners receiving their state pension will not get the large increase that theoretically they should have due to the triple-lock formula.

The 8.4% increase in average earnings, which makes up one leg of the triple-lock, was clearly a statistical outlier and caused by comparison to 2020 where average earnings fell last year caused by the economic impact of lockdowns.

I am not surprised this was suspended because the increase was an anomaly and it would have raised the level of pensions for future increases as well.

Total Care Costs Capped

Capping the cost of care, I think, is the most interesting policy of this whole announcement.

As financial planners, when we do projections and cashflow modelling for clients, we historically never have included care costs, simply because it was so uncertain. We just used the underlying assumption that the family home would be sold to fund the care costs.

The exciting part of this – well, exciting for me as a financial planner – is that this assumption no longer needs to be made. We can now plan with more precision.

With a maximum of £86,000 that can be spent on care per person, this allows a much better estimate of the potential size of the estate that can be passed down to beneficiaries.

Any projection still has any number of assumptions baked into it, so we can never be completely accurate, but this is certainly an improvement.

Another interesting anomaly is that with a fixed amount on the cap as well, this potentially helps people more in London as care home fees tend to be more expensive here.

In summary

We expected a rise in taxes and we’ve got it. Yes, it’s generally unpleasant but it certainly could have been worse. The capping of care costs is an interesting and progressive move which should provide people with much greater peace of mind when planning for their later years.

If you have any questions on any of these, please feel free to reach out.


Adam Walkom
Permanent Wealth Partners
Phone 020 3928 0950
Email adam@permanentwealth.co.uk
LinkedIn www.linkedin.com/in/adamgwalkom