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Economists and tax advisers have been warning for some time that tax rises were on the cards, with various suggestions for where this was going to come from, and how far rates were going to rise.

Top of the Chancellor’s pops has been the widely accepted notion that capital gains tax was on the hit list, given the rates are lower than income tax rates, and that tax is paid on investment gains rather than on income. Others had suggested a wealth tax, arguing that any increase to income tax would need to be sizeable in order to garner sufficient funds for the Treasury coffers.

So, in a somewhat surprising turn, the rumours of the last week have proven true and Mr Johnson has announced a new 1.25% ‘Health and Social Care Levy’ that will apply to earnings from April 2022. While the sums raised are to be hypothecated (ringfenced) for the NHS in the first year, from April 2023 onwards this will be a separate tax on earned income, collected through PAYE, with the proceeds going straight towards the NHS and Social Care budgets. From the same date, income tax on dividends will increase by the same amount. The move is expected to raise £12bn a year, alongside capping lifetime contributions to care costs at £86,000 per person, and raising the de minimis level for care contributions to £20,000 of assets.

While details remain scarce, Mr Johnson said the “new levy will share the cost between individuals and businesses” which suggests the increase will apply to both employees’ and employers’ rates of NI when first applied, and that there will be a separate employers’ levy from April 2023. This will mean the lower rate of NI paid by employees will increase to 13.25% and the higher rate to 3.25%, with employers likely looking at an additional 15.05% cost on employing workers. Furthermore, while those over State Pension age are exempt from paying NI, the Prime Minster suggest older workers will not be exempt from the new levy, confirming “everyone will contribute according to their means, including those above State Pension Age.”

The news of this new tax has not been well received. Leaving aside the issue of the Conservatives breaking their manifesto pledge, which they clearly would not have made if they had known about the pandemic, the move has been criticised for many as being regressive, and targeting the wrong people.

The Prime Minister, of course, rejects calls that the new cap is regressive, describing it as a “massively progressive measure” that “protects people up and down the country from catastrophic costs”. However, opposition MP John Trickett, MP for Hemsworth, West Yorks illustrated how the move will protect the wealthy and hit those with fewer assets with an illustration comparing his constituency with that of Mr Johnson.

Families in Johnson’s Uxbridge constituency with an average-priced house worth £500,000 would have an inheritance of over £410,000 per family after applying the £86,000 cap, even if care costs were many times this figure.

In Hemsworth, it would leave families with a house worth £130,000 with just £44,000 per family after care costs, even if those costs were far lower than the Uxbridge family above.

Other criticisms of the new tax are that the increase will be suffered more by lower income homes, and by those working to provide the care, for example nurses in the NHS and care workers. Any flat rate tax is likely to hit lower income households harder, as there is normally less disposable income available to absorb the extra cost. On the face of it, baby boomer pensioners also get off scot-free from this new tax, with no suggestion that pension income will be within the scope of the charge.

Furthermore, entrepreneurs and those receiving dividends from personal companies- who have received no furlough pay over the last 18 months of course- will now need to fork out more cash in tax on dividends that have already been subject to corporation tax, which is also increasing in the near future. There are no details on whether this will be simply added to income tax or a new separate levy as for earned income.

So is this a gamble Boris is going to win? He can hardly be said to be the unluckiest of politicians, but this is still a bold move. However, this is also a very politically-motivated move as the idea of a ringfenced “NHS and care tax” is something that may well be more palatable to voters, and the care cap is an added carrot.

Overall, something has to give and for now, it’s a new tax on income rather than a rise to income tax. While CGT has not yet been targeted, this does not mean it won’t be next on the hit list, with the final cost of COVID running into the hundreds of billions, rather than a mere £12bn a year. And besides, who is going to be brave enough now, or in the future, to scrap a tax designed purely to fund our beloved NHS?

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