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Paying for Social Care by Increasing National Insurance

David Bell

The UK government looks set to decide on a funding package to pay for the increased costs of social care in England, perhaps on Tuesday. The likely solution is an increase to national insurance, with both employers’ and employees’ contributions increasing. Surprisingly little attention has been paid to this development in Scotland.

Perhaps this reflects the current focus on setting up the National Care Service in Scotland following the Feeley report. Its main proposal was to change the paradigm of social care in Scotland to one based on human rights. It put the estimated cost of this development at £660 million, though no explanation was given as to how this would be funded.


The motivation for the proposals for England is somewhat different. There were a number of reviews of social care during the over the last decade (Dilnot, Barker) which urged the government to arrange a more equitable approach to funding social care. The Dilnot proposals suggested ways of avoiding “catastrophic” care costs – people having to sell their house to pay for social care. In England, the attention has always been around paying for care, while in Scotland the focus has been the design of the care system.


During the 2017 general election, the Conservatives committed to publish a green paper on social care reform. Nothing happened. Boris Johnson vowed to find a solution when the Tories were elected in 2019. The new proposals will be an attempt to deliver this commitment.


A 2p increase in national insurance directed towards social care would be a form of hypothecated tax. The suggestion is that this would comprise a 1p increase for employers and a 1p increase for employees. The UK Treasury has historically been opposed to hypothecation because it limits its freedom to allocate spending. It seems likely that the Treasury view has been overruled.


National insurance is a UK tax: the same rates and bands apply across the whole of the UK. The Smith Commission reinforced the commitment to retain it as a reserved tax.  But spending on social care within Scotland is the responsibility of the Scottish Government. The “departmental comparability factor” for Health and Social Care applied by HM Treasury in the 2020 Spending Review was 99.5%. The creation of a hypothecated tax at UK level to pay for a service that is the responsibility of the devolved administrations is fraught with difficulty.

Scotland raised £11.5 billion in national insurance in 2020-21. A 1p increase in both employees and employers contributions might raise around £800 million. This would cover the costs of setting up the National Care Service, but it would add further confusion to the fiscal framework which sets out how responsibilities for taxes and spending a are divided between the UK and Scottish Governments.

The £800 million would be collected by HMRC. The UK Government would commit that the extra national insurance contributions would be allocated to social care. But there is no obvious mechanism for transferring the £800 million raised in Scotland to the Scottish Government because national insurance is a reserved tax.

The UK Government could wait until the additional contributions were allocated to social care and then apply the Barnett Formula to the extra spending. This would mean Scotland getting its population share of the extra revenue from national insurance, rather than the amount of national insurance raised in Scotland. This would perhaps mean around a further £75 million being transferred to Scotland. From an English perspective, this extra transfer to Scotland (and also to Wales and Northern Ireland) undermines the point of an hypothecated tax. If the money is raised to address an English issue, why should some of the funding be transferred to the devolved administrations?

If, in the spirit of hypothecation, funding was allocated to the devolved administrations in line with the amount of additional tax raised, there would be another set of problems. Firstly, Wales and Northern Ireland would receive relatively little due to their weaker labour markets. Second, such a transfer would undermine the devolved authorities’ fiscal frameworks, which were not designed to accommodate hypothecated taxes at UK level that affect devolved spending. Cue further intergovernmental disputes.

In Scotland, the overall tax on income, which combines income tax and national insurance, is badly designed due to the interaction of the national insurance bands set by the UK government and the income tax bands set by the Scottish Government. Because of this, the marginal tax rate on employment costs for those earning between £48,500 and £60,000 is 58.7%. A 1p increase in each of employers’ and employees’ national insurance rates will push this rate above 60%. This cannot be conducive to expanding employment in Scotland.

There has been ample time to consider how best to fund the inevitable increase in social care costs. But it seems that decisions are being made on the hoof. A number of objections have already been raised to increasing national insurance to pay for social care: the implications for relations with the devolved administrations can be added to the list.