What are “stealth taxes”, and how could they affect your wealth?

12 January 2023

Over the last few months, you may have heard the term “stealth taxes”. While you may not be affected by changing tax rates or lowered thresholds immediately, your tax bill could rise without you noticing due to freezes in certain allowances or exemptions. 

The term stealth tax is used to refer to a levy that you might not think of as a tax hike but nonetheless has the same effect.

The phrase has been seen in the headlines since chancellor Jeremy Hunt laid out a package of tax rises worth £24 billion in the autumn statement last year.

It’s clear how some of the measures will affect your wealth. For example, the Dividend Allowance will fall from £2,000 to just £500 by 2024. So, if you receive dividends, your tax liability may rise. However, Hunt also announced other measures that could affect how much tax you pay that you may have overlooked.

Read on to find out what stealth taxes could affect your wealth.

Chancellor Jeremy Hunt froze key tax thresholds until 2028

During the autumn statement, Hunt announced that some thresholds and allowances would be frozen until 2028:

• Income Tax bands, including the Personal Allowance
• National Insurance thresholds
• Nil-rate band, which is the threshold for paying Inheritance Tax (IHT).

Previously, the Lifetime Allowance, which limits the amount of pension benefits you can tax-efficiently save during your lifetime, was also frozen at £1,073,100 until 2026.

At first glance, keeping allowances at their current level may seem like it’ll have little effect on your tax bill or wealth. Yet, in real terms, it can. 

Frozen thresholds mean the value of allowances falls over the long term

Freezes to thresholds can affect your wealth when you consider the effect over years. As the cost of goods rise, the value of allowances falls in real terms, so they’re not as valuable as they once were.

Let’s say you benefit from a pay rise each year that’s in line with inflation. This maintains your spending power as the costs of goods and services rise.

If Income Tax thresholds don’t rise in line with inflation, a larger proportion of your wages will be deducted. You could also find that you’re in a higher tax band, even if your income hasn’t increased in real terms once inflation is considered. 

According to the BBC, freezing the Income Tax bands until 2028 will create an additional 3.2 million new tax payers and mean 2.6 million more people will pay a higher rate of tax. So, while your Income Tax bill may not immediately increase, in real terms you could end up paying more. 

The issue is currently exacerbated by high levels of inflation. However, even when inflation is stable – the Bank of England has an inflation target of 2% a year – the effect of prices rising adds up.

The freezes can also affect your long-term plans. 

Take the IHT nil-rate band, for instance. The current threshold means you can pass on £325,000 before your estate could be liable for IHT. However, over the next five years while the threshold is frozen, the value of your assets could rise. 

As a result, more families will need to consider if their estate could be liable for IHT and how it’d affect the wealth they leave behind for their loved ones. 

The Office for Budget Responsibility estimates that freezing the nil-rate band will boost the government’s income from IHT by £1 billion by the 2027/28 tax year.

What can you do to limit the effect of stealth taxes?

With key allowances frozen until 2028, it’s vital you understand how they could affect your financial plan and the options that could reduce the effect. To make the most of your money, it’s more important than ever to make use of allowances that are right for you.

A regularly reviewed financial plan can help you manage your finances and reflect changes in thresholds, including freezes. We can work with you to identify:

• The allowances that could be right for you
• How to make the most of your wealth so it grows in real terms
• Steps that could help you mitigate a tax bill in the future. 

If you’d like to arrange a meeting with us or have any questions about how the chancellor’s announcements could affect your long-term wealth, please get in touch. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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