Social care reforms: the bottom line impact on your finances

Following the recently announced social care reforms, how will the tax increases and new self-funding care caps affect you, your personal finances and your inheritance planning?

As the summer of 2021 neared its final days, the government finally took the plunge in announcing a plan to solve the issue previous governments have kicked down the road for many years: spiralling social care costs for an ageing population and an underfunded NHS.

In the end it took a global pandemic to force action. Social care reforms have long been on the cards, but the urgency has been compounded by Covid-induced strains on hospitals which have increased NHS treatment backlogs to over 5 million people in England alone.

The answer, the government believes, is a 1.25% tax hike, which will initially be collected via an increase to National Insurance contributions in the 2022-23 tax year, before then being introduced as a new and separate 'Health and Social Care Levy' from April 2023. Unlike National Insurance, the levy will be charged to state pensioners who are still working.

Company directors who take their income mainly from dividends (which are spared National Insurance) do not escape the tax hike, as the government will also increase dividend tax by 1.25% from April 2022. It means pensioners will experience the tax rise on their investment income, having already been affected by the chancellor's move earlier this year to freeze the income tax personal allowance and higher rate threshold for four years from April 2022.

“A lot of pensioners rely on their investment income to supplement their pensions, so all of these changes combined mean they will in real terms have less money to live on,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd. “That will be increasingly so as inflation pushes prices up in the years ahead, and we shouldn’t expect it to just be a short-term hit.

“For a decade, this country has been looking at how unsustainable our current social care system is. Add a pandemic and there are some serious funding issues not only for general services and the care system but also to continue paying the state pension at current levels. They needed a longer-term solution and so I expect something to be in place permanently.”

Capping your care costs

The government was eager to supplement the tax announcements with more welcome news surrounding social care funding. Currently, people in England with assets worth more than £23,250 have to pay for all of their social care, and if they have assets below £23,250 (but above £14,250) they are charged a proportion of the costs. From October 2023, however, the government will help fund social care costs for those with assets worth up to £100,000, on a sliding scale down to £20,000, under which it will fund all social care costs.

People in the £20,000 to £100,000 bracket will not have to contribute more than 20% of their assets each year, and those with assets worth over £100,000 will benefit from the introduction of a lifetime fee cap set initially at £86,000, which the government says is equivalent to about three years of full-time care. Whatever asset bracket they fall into, pensioners might still have to make a contribution to care costs from any income they have.

Clients may initially be more consumed by the impending impact of the tax hikes on their income from next year. Careful planning is needed to consider how best to take earnings and how to utilise the likes of pension and ISA contributions to increase tax efficiencies.

But it would also be wise to consider the implications of the self-care funding brackets on inheritance. Individuals whose asset value is in one property, for instance, should understand how the rules implicate decisions they might make around reducing their assets.

Planning for the future

It is reasonable to expect that insurance-backed products could soon enter the market to lend those in the £20,000 to £100,000 bracket more security and confidence when it comes to cascading wealth down to children without worrying about what their care costs might be.

Inheritance tax planning efforts need reviewing where clients have already taken action, with extra thought given to whether or not assets should be left inside estates or ownership structures altered. One important caveat to the new self-funding cap, which many people have overlooked, is that it applies only to care, not accommodation, which can be significant should it be too difficult for partners or relatives to provide full-time care in their own homes.

“Whilst the care costs are capped, the cost of accommodation in a residential home can still escalate quickly and utilise a significant portion of client estates,” says Helen​ Richardson, Independent Financial Adviser at Ascot Lloyd. “Those with large care needs may find a large portion of their estate is eroded by residential cost, so the issue still needs careful planning.

“There is no crystal ball to view what costs will be in the future, if any, but it is important to include younger generations earlier in the advice process so families can make decisions about inter-generational wealth planning collectively. Planning ahead can be less emotionally challenging than trying to find solutions when it is too late to meet every goal, such as combining a care need with a desire to leave beneficiaries large portions of wealth.”

Ascot Lloyd engages with clients regularly to adapt life plans to changing legislation and taxation. If you or your loved ones would like to discuss the potential impact of the Health and Social Care Levy on your financial plans, or any financial planning support generally, please contact your Ascot Lloyd Independent Financial Adviser. They would be happy to help and will gladly involve family members in meetings where you wish them to do so.

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