Taxation is a difficult subject for a variety of reasons: which model, for example, is fairer for the largest proportion of the population – flat tax or progressive tax? Likewise, how can some people avoid tax through loopholes while others have tax taken directly from their wages? And how do we know the money we give is being spent on the right areas of society? This last question is our focus for today as we take a closer look at National Health Service (NHS) funding – namely, how is it funded, and if hypothecated tax could work as a new funding method for the organisation.  

NHS Funding – The Current Model 

The government are planning to spend around £122 billion this year on the NHS according to a report by the King’s Fund.. That’s some serious cash, and it works out to just under £2,000 per person per year. But where does the money come from? The short answer is tax.  

National Insurance is a tax in everything but name. It’s taken directly from employees at the source (the monthly pay packet), and employers and the self-employed must also contribute. It’s split into classes, with each class giving citizens certain benefits like a state pension (after 35 years of contribution), bereavement payments and Job Seeker’s Allowance. National Insurance also funds the NHS, but it is mainly used for benefits like pension payments; of the proposed £125bn raised via National Insurance, around £94bn goes on pensions. The NHS gets around £24bn of the rest according to health insurance company Saga. It’s a vaguely progressive tax in that those who earn more pay more.   

Income Tax, like National Insurance, is taken at source from employee pay packets and is used to fund the NHS, other public services like the police service, and government bail-out packages needed for private sector collapses like the 2008 banking crisis. Self-employed workers have to fill in a tax return each year. According to the Institute for Fiscal Studies, an estimated £182bn was raised in 2016 from income tax. It is another progressive tax in that those who earn more are charged a higher percentage rate tax.  

Other taxes that deliver substantial sums for the government budget include value-added tax, or VAT, which was projected to raise an estimated £120bn in the 2016/2017 financial year. This is the tax added to products or services and is paid by the consumers or by businesses through business-to-business transactions. A flat rate of 20% is added to most products; however, a zero-rate and a reduced-rate VAT also exist which offer discounts on certain products.  

Corporation tax lags behind all three in terms of the amount contributed to the government budget at an estimated £42bn. Similar to VAT, corporation tax is charged across the board at a 20% rate on all profits for limited companies, and foreign companies with one or more branches in the UK.  

Adding a relatively small amount to the NHS’s budget is the amount charged to service users through prescriptions and some treatments.  

Hypothecated Tax  

Recent reports have highlighted that the general public is behind a proposed increase in funding for the NHS: “Two in three people are prepared to pay more tax in order to ensure the cash-strapped NHS has the money it needs to provide good care,” reported the Guardian. Likewise, politicians have increased pressure on the Prime Minister to reconsider how the NHS is funded. An idea for a new form of de-politicised taxation would see National Insurance rebranded and taken out of the control of the government. The tax would be paid directly from workers into a fund that the government has no direct control over. Instead of using the NHS as a leverage for political battles, instead, the UK taxpayer would commit a set amount of money to the service which would be assessed periodically.  

If hypothecated tax sounds somewhat familiar, it may be recognisable in the TV licence payment many make each year in the UK. The law demands we pay the fee if we want to watch television (online included), and the fund pays for the BBC’s television and radio services which should be exempt from political interference. 

Could it work? If the BBC is anything to go by, hypothecated tax could be the answer the NHS is looking for, although the pressures on delivering quality healthcare are hardly comparable to pulling in good ratings for the Gavin and Stacey Christmas special. Telegraph columnist Charles Moore used the hypothecated tax discussion to remind readers of what happened the last time taxation had no representation. For Mr Moore, taxation is and always will be a subject that should remain at the heart of the democratic discourse; to remove the debate on tax “would be a subversion of democracy.” 

A Healthy Political Outlook?  

While the NHS should not be seen as a bottomless pit into which money should be continuously poured, funding it sensibly to benefit the health and well-being of the citizens must be the government’s primary focus. Seeing the problem as purely political can remove those in power from the everyday struggle being faced by front-line workers and service users. We’ll finish with what feels like a particularly appropriate quote from the King’s Fund Autumn 2016 statement: 

“While there are significant opportunities to improve productivity in the NHS, the huge pressures now being felt right across the health and care system mean that the pace of change required to deliver £22 billion of productivity improvements by the end of this parliament is unrealistic.” 

Interested in learning more about the various forms of taxation? AAT qualifications cover topics like tax all the way from basic concepts up to the more advanced levels of taxation. Contact a course advisor today to find out how AAT can help you achieve your professional goals.

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