Stealth taxes can cause individuals and businesses to use significant amounts of money if their exposure is not properly managed. Here is our guide to the most common types of stealth tax.
What is stealth tax?
The term ‘stealth tax’ refers to ways in which an individual or business’s tax bill is increased through factors that are not the tax rate itself. The term also sometimes refers to taxes which are less ‘visible’ to those paying them. This includes VAT being baked into the price of goods or the introduction of regulations that increase the cost of doing certain things.
Individuals and businesses should be aware of how their changing circumstances could incur stealth taxes. Financial experts will be able to advise on how best to mitigate exposure and reduce the overall bill.
Here are some stealth tax examples:
Income Tax Freeze
The rate of income tax has been frozen until 2028, which inherently can increase people’s tax bills in ways that are not immediately perceivable. Salaries rise over time with inflation, and so their tax bill increases as they earn more.
Furthermore, more people are paying the higher rates of tax. However, their buying power goes down, as prices have risen too, and they are paying more in tax. This is often referred to as ‘fiscal drag’.
Loss of personal allowance
Another income stealth tax occurs between £100,000 and £125,140. This coincides with a 40% tax rate. However, the income between this amount is effectively taxed at 60% due to the loss of the personal allowance, which is the untaxed initial £12,570 earned.
For every £2 an individual earns above £100,000, they lose £1 of untaxed personal allowance. This means that 40% of income between these amounts is taxed, while a further 20% is taxed as the personal allowance tapers away. Add on national insurance and other taxes, and individuals in this tax bracket start to lose significant proportions of their income.
Dividends and capital gains
The tax-free allowance for dividends was reduced to just £500. This adds an extra taxable £1500 to many shareholders’ incomes. Furthermore, the capital gains tax allowance has been cut, now reaching as low as £3,000. As a result, many people’s savings and investments are increasingly being taxed more and more each tax year.
J Sweeney Accountants’ tax planning services can help companies and individuals to be efficient with their taxation exposure.
