How our tax system discriminates against private health insurance

The sham debate about the spectre of ‘NHS privatisation’ has come back with such a vengeance this year, you’d be forgiven for thinking there was an election ahead. While the debate over private provision of publicly funded services is, at long last, becoming a tiny bit more nuanced (or at least less hysterical), we still shy away from considering the ‘big bang’ option: private health care.

The UK is a country where we treat our pets better than our relatives and our employees.  For a simple fee per service or insurance plan, Fido will be seen by the vet of your choice, and offered a wide range of treatments in hours or days. Granny, however, is seen by whoever the hospital sees fit, and she waits as long as it takes, with many treatments heavily rationed. Pavel, meanwhile, waits weeks for physiotherapy for his back problems, and is put on ‘light duties’ at his warehouse in the meantime.

It may surprise many that 70% of private health insurance policies are purchased by employers for their workers.  For tax purposes, this is treated as a benefit in kind, which means the employer pays 13.8% of the policy’s value as NI (assuming a class A employee). He further pays 6% Insurance Premium Tax.

Perhaps the greatest deterrent to better private health cover is that the policy is treated as a benefit to the employee who pays income tax at their highest rate for the privilege. Government is well skilled at hiding tax increases by labelling part of them as ‘employer contributions’, pretending that this arbitrary distinction had any impact on how payroll taxes are really split between employee and employers.

But one could make a good case for treating employer-sponsored health insurance as a business cost like any other, not as a part of the wage packet. A company earns considerable benefits in terms of stability of workforce and reduction in time off work. The NHS benefits from the ensuing reduction in healthcare demand, and also by the boost to the public purse. At an income tax rate of 40%, an insurance policy worth £1000 costs the employee £400 and the employer £198 in NI and IPT (accepting the nominal split for the sake of the argument). Almost 60% of the value of the policy is taken as tax.

Compare this to an insurance policy covering a piece of machinery, a comparable investment if you think of labour and capital as inputs in the company’s production function. The company pays to restore its machinery to working order quickly, and pays 6% IPT on top, but the expense is otherwise treated as what it is: a business cost. £1000 buys £940 worth of insurance for machinery but only £402 of insurance for an employee.

It would be economically sensible, and fair, to abolish the benefit in kind status of employer-sponsored health insurance altogether. This could be achieved incrementally by introducing a tax-free allowance. A £1000 tax free allowance for privately purchased health plans, both for employer and employee, would radically increase the competitiveness of private health care and help offload demand from the NHS. This could be a first step towards a more radical – but also far more logical and consistent – policy of allowing people to opt out of NHS care altogether, receive a tax rebate equivalent to what it would otherwise have cost to treat them on the NHS, and let them use that rebate to purchase an alternative private health plan of their choice. But that is a story for another day: a more sensible tax system, which does not arbitrarily discriminate between different types of business costs, would be a good start.

Compared to the Chancellor’s promise of not taxing the first £1000 of bank account interest in the recent Budget, a tax-free health care allowance would benefit wage earners rather than savers and would attract money into UK health care provision at a time when funding is tight.