Care homes - is the government helping or hindering?

The five biggest providers of care homes in the UK have written to the Chancellor to say that the introduction of the ‘National Living Wage’ (NLW) next year could result in a “catastrophic collapse” in the number of homes, given that staff costs amount to 60% of the cost of care.

Under plans announced in the July Budget, the NLW for workers aged 25 or over will be £7.20 an hour from April 2016, rising to £9 by 2020. This compares to a current ‘National Minimum Wage’ for workers aged 21 and over of £6.50 (due to rise to £6.70 in October 2015).

Without doubt these increased costs will have a significant effect on the care sector, but there were other measures in the Budget that will go some way to soften the blow.

The ‘employment allowance’ currently allows an employer to reduce the total employer’s national insurance contributions it pays by £2,000 a year. From April 2016 this will increase to £3,000, potentially resulting in significant cost reductions in labour-intensive industries. However, because the maximum allowance is the same irrespective of the size of the employer, the benefit will primarily be felt by smaller organisations.

The Budget also continued the trend of reducing the rate of corporation tax, so that the 20% rate that took effect from 1 April 2015 will fall to 19% from 1 April 2017 and to 18% from 1 April 2020. This means that the UK has one of the lowest corporation tax rates of any major industrialised nation. However, falls in corporation tax are only good news for companies that expect to make profits. For companies squeezed between higher government-imposed costs and spending restrictions on government-funded care the question is whether there will be any profits to pay tax on.

In the Autumn Statement 2014 the government extended the employment allowance to individuals employing care or support workers in their own home, and in the July Budget it announced changes to inheritance tax where a residence is left on death to a direct descendant. These measures may have some limited effect on demand for care home places, but they will not change the economics of the industry, which are driven by the needs of an ageing population.

If you have any questions regarding these changes, please get in touch.


Jacquelyn Kimber