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This article was first published in the September 2018 UK edition of Accounting and Business magazine.

Now that the bunting has been put away following the 70th birthday celebrations of the National Health Service, it’s time to unwrap the government’s present. But instead of the usual question about whether it kept the receipt, a more appropriate concern would be whether the government can afford the additional 3.4% annual increase in spending over the next five years that it has pledged to splash out on the septuagenarian. That’s an extra £20bn by 2023/24.

Rather like having a whip-round in the office to pay for someone’s milestone birthday, it looks increasingly likely that the UK’s taxpayers will be asked to make a contribution, whether they like it or not. Details are rather sketchy at the moment, although there is the possibility that some will emerge during the party conference season. The Conservatives will be descending on Birmingham from 30 September for their annual get-together and no doubt the NHS will be a hot topic.

The ground has been well prepared for the health premium of tax rises, but questions remain over which tax or taxes will go up and by how much. The big unknown will be the size of the Brexit dividend, although any wise accountant would say that this should not be relied upon and that any shortfall between tax increases and the promised funding might have to be made up through increased government borrowing. Indeed, the Brexit dividend might materialise in the form of an increased government deficit if tax receipts fall after the UK exits the EU.

So, what are the options that face the government, and Chancellor of the Exchequer Philip Hammond in particular, for he will be the government minister who will have to announce tax changes in his annual Budget.

His thinking could be informed by market research: according to healthcare think-tank The King’s Fund, which analysed the latest data from the British Social Attitudes survey on the subject, 61% of respondents support tax rises to increase NHS funding – an increase of 12 percentage points from 2016. Breaking this down, 35% supported a separate tax that would go direct to the NHS, while 26% would be happy to pay more through their existing taxes.

So, a hypothecated tax would appear to be most popular. Earlier this year, the Liberal Democrats called for a ring-fenced health and care tax built around reforms to national insurance contributions (NICs). There has been support for this and similar ideas on both sides of the House, and indeed in both chambers of parliament. Or to make it simple, the tax rise could come in the form of an overall increase in NIC rates.

Proper accountability

The UK has, of course, been here before. In 2002, Gordon Brown, then chancellor, added an additional 1% to employers’ and employees’ NICs to help plug NHS funding gaps. ‘The old idea of increasing NIC is being floated,’ says ACCA head of taxation Chas Roy-Chowdhury. ‘When Gordon Brown made his announcement in 2002, he assured us that the money would be well spent, but we never saw any such evidence. We are now in the same situation and we will need to have proper accountability.’

This is also one of the downsides of hypothecation – if taxpayers are asked to pay a dedicated tax that will be ring-fenced for a particular purpose, then scrutiny over how it is spent will be intensified. A further downside is that the tax rate may have to rise in the future if needs increase. As the Institute of Fiscal Studies (IFS) points out in a recent publication Does the NHS need more money and how could we pay for it?, NICs were almost equal to NHS spending in 2007-08 but two years later, following a recession, NHS spending was £24bn higher. ‘Topping up spending from other revenue then raises the question of what purpose the hypothecation would have served in the first place – how do we know that the government would not have spent this amount on the NHS all along?’ the IFS asks in its report.

There are other options, of course. A straightforward increase in income tax could be used, although politically that might be difficult to swallow. Likewise, a move away from the commitments previously made by the government on increasing individual personal allowances might not win support either inside or outside parliament. Abandoning cuts to corporation tax might be a possibility, though Roy-Chowdhury points out that this would not raise sufficient revenue to cover the increased expenditure. Then there is the possibility of increasing the duty on fuel and alcohol, but again it is unlikely that such a move would raise enough cash.

Looking specifically at income tax, there have been suggestions that the additional NHS funding might require an increase of three percentage points in the basic and higher rates. However, accountants at Blick Rothenberg believe such a rate might not be necessary and that an additional 1% on top of current rates might be all that is required.

Robert Pullen, a director at the firm, says a 3% tax increase would likely cause further issues within the government, but a more manageable increase of just 1% to income tax rates could give the additional funding required. ‘The NHS budget in 2016-17 was around £122bn and so a 3.4% funding increase, as proposed, would broadly be equivalent to an extra £4.2bn per year,’ Pullen says. ‘We calculated, using HMRC statistics, that if income tax rates were increased by 1%, then in the tax year 2016-17, an extra £4.2bn would have been generated.’

In hard cash terms, Blick Rothenberg calculates that a 1% increase for an employed worker not at retirement age would mean extra tax of £297 for someone on £25,000 (1.19% effective tax rate) and up to £3,196 for someone on £200,000 (1.96% effective tax rate). So for basic-rate taxpayers, the additional costs would be just over 80p a day – relatively low and affordable.

As Pullen says: ‘This would go some way to filling the hole in the finances without relying on the “Brexit dividend” crystallising, but if the dividend does come to fruition, the 1% could be even less.’

Philip Smith, journalist