Taxes can be complicated and costly at the best of times. So, if you’ve seen the term “stealth tax” in the news lately, it is natural to have felt increasingly worried about what that could mean for your financial plans.
The term “stealth tax” was coined in the early 1990s by Conservative politicians and refers to any rule applied in a way that means it might not be recognised as a tax hike, even though it has the same effect.
Stealth taxes have become more frequent as a consequence of recent government policies — such as the freezing of tax thresholds — and have become an issue for an increasingly large number of Brits.
For example, according to the Express, the freezing of Income Tax allowances and thresholds means that, by 2027, 1 in 5 UK taxpayers will be paying the higher 40% tax rate.
Read on to discover what stealth taxes could mean for your potential liability.
Frozen Income Tax thresholds mean almost 3 million Brits will now have to pay basic or higher rates for the first time
Government policy changes arising from chancellor Jeremy Hunt’s autumn statement and spring Budget — such as the freezing of Personal Allowances until 2028 and a reduction in the threshold for additional-rate Income Tax — has created a growing stealth tax issue.
The Independent reports that the UK workforce could end up paying an additional £29.3 billion in Income Tax in five years’ time, as a growing number of individuals are dragged into paying higher rates of tax.
As thresholds are not currently being raised in line with inflation, it is creating “fiscal drag”, a situation in which taxpayers are essentially brought into new tax brackets as their earnings increase.
The situation is compounded further for individuals earning between £100,000 and £125,140 a year, as the threshold freeze combined with the tapering of the Personal Allowance could lead to them effectively paying a 60% tax rate.
Read more: Why pension contributions could help you navigate the 60% tax trap
According to the Guardian, at an individual level, if a person earns £51,000 and receives an annual pay rise of 3%, a freeze on the Personal Allowance and Income Tax thresholds, means they will have paid an additional £8,623 in Income Tax after six years.
The growing stealth tax net has the potential to significantly increase your tax liability and affect your financial plans. However, there are steps you could take to avoid falling foul of potential stealth taxes.
3 clever ways you could reduce your Income Tax bill
1. Remember to make use of your pension contributions
Workplace or private pension schemes can be incredibly useful ways to reduce your Income Tax, while simultaneously saving for your retirement.
Pension contributions benefit from Income Tax relief from the government at your marginal rate of tax. At the 20% basic rate, this effectively means it costs you £400 for every £500 contributed to your pension pot. If you’re a higher- or additional-rate taxpayer, you can claim further tax relief back through self-assessment.
The maximum Annual Allowance for pension contributions has risen to £60,000 each year (2023/24 tax year). You can also utilise unused allowances from up to a maximum of three previous tax years.
2. Consider investing in start-up firms through Venture Capital Trusts (VCTs) or the Enterprise Investment Scheme (EIS)
An investment into a qualifying VCT or EIS attracts Income Tax relief on the amount you invest. For VCTs and the EIS you could receive 30% in Income Tax relief up to the maximum relief cut-off.
VCTs and the EIS allow you to use your wealth to support small, fledgling startup firms that are seeking to raise funds to stimulate the growth of their businesses. These businesses have the potential to return sizeable growth on your initial investment but, as young businesses, they also carry a greater risk of potential failure.
Both options can be especially attractive if you have maximised your other allowances for the tax year and are facing a higher- or additional-rate tax bill.
There are various rules that apply to the amount you can invest and how long you’ll need to retain your investment before seeing certain benefits.
Read more: 6 useful pros and cons that might help people who want to invest in start-up firms
3. Make charitable donations and benefit from the corresponding tax relief
Donating to charity has the dual benefit of allowing you to put your hard-earned money to use helping a good cause and can also help you reduce your potential tax bill.
One way to donate to a UK-registered charity is through Gift Aid. This scheme allows the charity to claim an additional £25 for every £100 they receive in donations.
It allows you to effectively claim back your Income Tax rate on the value of the donation. If you are a higher- (40%) or additional-rate (45%) taxpayer, you can usually claim the difference between your tax rate and the basic rate of tax (20%) on your total charitable donation.
Get in touch
If you’re worried about potentially being dragged into a higher Income Tax bracket or facing a heftier tax bill in the future — stay calm. There are plenty of ways to help you improve your tax plans and gain helpful tax relief.
To gain further insights and advice, reach out to us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.
Production
