Closing the funding gap

Based on the modelling in this report, keeping pace with rising demand and cost pressures using the current system for adult social care will require additional investment of £1.5bn a year by 2020/21. This will rise to an extra £6.1bn a year by 2030/31. Even with no change in the funding model for adult social care, national action will be required to make this funding available.

Introducing changes to the model in order to provide publicly funded care to more people would further increase the need for additional funding. The introduction of a cap and floor, as proposed in the Conservative Party manifesto, could increase the projected funding gap from £1.5bn to £5.5bn in 2020/21, and from £6.1bn to £11.9bn in 2030/31. Alternatively, introducing FPC could increase the projected funding gap to £7.0bn and £14.0bn respectively.

There are many options for how this additional funding could be made available. This section sets out four potential scenarios:

  • taxing income
  • taxing high earners
  • taxing or redirecting spend on older people
  • taxing wealth.

There are positive and negative implications of each, and no recommendation is made on the suitability of the options.

Taxing income

The government could look to a broad increase in NICs. Adding 1p per £1 to the main rate, higher rate and employers’ contribution to National Insurance by 2030/31 would raise enough to fund the introduction of the cap and floor model. If means testing was introduced to winter fuel payments at the same time, this could be enough to introduce FPC (Table 10).

Alternatively, adding 2p to the basic, higher and top levels of income tax, or 3p to VAT, would provide more than enough to fund either the cap and floor or FPC, and would be sufficient to improve access and quality close to the levels observed in 2009/10.

Another option available would be to exploit fiscal drag. This could raise significant sums through holding all tax allowances constant at 2017/18 prices. This could generate an extra £6.8bn for English adult social care in 2021 if there was no uprating of allowances and bandings (in this case on income tax). This might present a different approach to taxing income and is broadly progressive. However, this alone is not a realistic long-term solution, but more a political lever that could be used alongside other changes.

Taxing high earners

An alternative approach is to only increase tax paid by those earning the highest incomes, by increasing only the top rate of National Insurance and the top and higher rates of income tax. This approach would be progressive in nature but would require substantial increases in the rates. For example, just meeting the current funding pressures would require a 7p per £1 increase in the top rate of income tax in 2030/31.

Improving access back to levels observed in 2009/10 would need an 18p increase in the top rate of income tax in 2030/31, while introducing free personal care would require an additional 16p.

This would further increase the burden placed on a very small portion of the population. Currently the top 1% of earners account for 28% of all income tax paid to HMRC, and households earning the top 10% of incomes pay around 27% of total taxes.

Taxing or redirecting spend on older people

A common argument for how to raise funding for social care is that, as older people are the greatest benefactors of an improved care system, they should contribute towards funding any improvement to the model. This would likely involve raising taxes but also reducing spending on current benefits provided to older people.

In a best-case scenario, where the maximum saving and revenue are realised, around £10bn could be raised through the following initiatives by 2030/31. As such, they may be enough to close the funding gap under the current system, but would not provide sufficient additional funding for the cap and floor model or full personal care. They would therefore need to be part of a wider solution.

Means testing the winter fuel payment

Everyone born on or before 5 August 1953 is entitled to a winter fuel payment (WFP) of between £100 and £300 to help pay for heating bills, at a total cost of £2.1bn a year. The Conservative Party’s pre-election proposals included means testing the WFP to reduce the number of people receiving it. Linking the WFP to another means test, such as pension credit, is likely to be the most cost-effective way of doing this and would reduce the total cost from £2.1bn to £300m. This would mean an additional £1.8bn could be available for social care services. It would therefore only be a contribution towards the funding gap for any of the proposed models. It is also a regressive option as the poorest pensioners (excluding those on pension credit) would lose a higher share of their income. There is also a risk that people who rely on WFP and are eligible for it would not receive it; for example, nearly a third of eligible pensioners are thought not to access pension credit.

Extending NICs beyond retirement age

This could raise a further £1bn. However, empirical literature suggests that the employment decisions of people around retirement age are much more responsive to financial incentives than those at younger ages. The behavioural impacts are therefore likely to be much greater, and would reduce the total estimated revenue raised. The Mirrlees Review of the tax system argued that the UK should strengthen work incentives among older people – not weaken them – for precisely that reason. Alternatively, if National Insurance were imposed on income of private pensions, it would raise about £350m a year for each 1p on the rate – this would avoid disincentivising work but face significant opposition from pensioners.

Moving from a ‘triple-lock’ to a ‘double-lock’ on pensions

This has been advocated by Baroness Altmann, and was also initially proposed in the Conservative Party’s 2017 manifesto. It would see the basic state pension and new state pension still increasing by the highest of either price inflation or average wages, but would drop the third condition of rising by at least 2.5% a year. Under the right circumstances this has the potential to significantly reduce public spending on pensions, which could be redirected to social care. But the impact of this policy is incremental, as savings are only accrued over time. Crucially, the amount released would also depend on the outlook for wages growth.

Under the most optimistic scenario derived from HM Treasury figures, the IPPR estimates that an additional £7bn could be generated by 2030 from such an approach. But, it could alternatively result in no additional funding at all if inflation or wage growth exceed 2.5%, as is usually the case.

Taxing wealth

Another option is to move the balance of the UK tax burden away from income to fall on the accumulated private household wealth, which has reached an unprecedented scale (notably through property and pensions). However, these new ideas are harder to model accurately and potential behavioural effects are not fully understood.

One option within this approach is to increase inheritance tax (IHT), both in terms of raising the rate and lowering the threshold. Changes to IHT and National Insurance were proposed to fund the Dilnot reforms in the 2015 Spending Review. ‘Ready reckoners’ published by HM Treasury estimate that a 10% increase in the rate of IHT to 2021 could raise £1.5bn. Lowering the threshold at which no inheritance tax was paid could raise £75m for each £5,000 decrease. Yet total current receipts for IHT are only £4.8bn, so it seems that marginal changes would only provide some of the additional funding required for social care.

A version of this reform was proposed by then Health Secretary Andy Burnham in 2010: the ‘care duty’ of 10–15% of estates. The Strategic Society modelled that a 13% levy could raise up to £6.5bn (this is an approximation and was by necessity modelled for 2008 property values). This could make a significant contribution towards funding improved care in the short term, but implications for long-term funding will depend on aspects such as changes in the property market.

Other proposals include changes to council tax beyond the social care precept, such as an additional council tax band. The Resolution Foundation estimates that a family living in a £100,000 house currently faces a tax rate five times higher than one living in a house worth £1m. It proposes that a 1% tax on the value of properties above £100,000 could potentially raise £9bn in revenues. This would therefore cover the cost of each of the alternatives modelled in 2020/21.

Wealth taxes such as those discussed here are generally regarded as progressive options, as the proportion of tax increases with total wealth. And clearly options exist that could fund at least part of an improved social care system. However, such approaches could prove controversial, as many people’s homes have risen dramatically in value while their incomes have not. Equally, the introduction of the value of property into the means test for domiciliary care within the Conservative Party’s manifesto proposal could be argued to be a form of tax on property. In this instance, it might become more politically acceptable to pay for this proposal using separate taxes on wealth.


††††††††††† As explained above, the tax benefit model does not make any adjustment for behavioural change, which may reduce the amount raised. The level of behavioural change is generally thought to be greater for higher earners, increasing the uncertainty of these figures. Therefore the actual required increase is likely to be higher than the figures provided here.

‡‡‡‡‡‡‡‡‡‡‡ A ’smoothed earning link’ has also been proposed by the Work and Pensions Committee but is not discussed in detail here.

§§§§§§§§§§§ This is a UK cash figure which corresponds with the adjusted figure of £4.8bn in Table 10.

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