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The headlines often speak of “stealth taxes” – but what are they exactly, and how might they affect you? In this article, our financial planners at Cedar House explain some of the common steal taxes encountered in 2022-23 and how to account for them in a tax plan. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
What are stealth taxes?
Stealth taxes are taxes that begin to apply to an individual without clear warning or notification. They are particularly useful for a government, since they can help raise money for the public purse without spending a lot of “political capital” (e.g. causing widespread public outcry). Stealth taxes are sometimes identified by the media before they come into force. Yet due to their often complex nature, the news may be constrained in how far it can travel to audiences.
Prominent stealth taxes in 2022-23
There is no comprehensive list of stealth taxes here in the UK. This is partly because taxes will affect each person differently and the tax system constantly changes. In 2022-23, however, one prominent stealth tax is the “freeze” of income tax bands. Since average UK wages tend to go up every year, this can push an individual into a higher tax bracket without realising it. Notably, 1m more UK workers are expected to start paying the 40% Higher Rate by 2026 as their wages steadily increase, costing families £10.9 billion.
Another potential stealth tax to be aware of in 2022-23 is the tax on interest. Typically, someone on the Basic Rate can earn up to £1,000 interest outside an ISA (or up to £500 for those on the Higher Rate) without facing tax. Due to very low interest rates in recent years, this has meant that very few people end up breaching their tax-free allowance. However, now that interest rates are rising in 2022 (due to the Bank of England trying to fight rising inflation), banks are also starting to raise their own rates offered to customers. Therefore, there is a risk that some people might end up earning more interest which takes them over their Personal Savings Allowance.
There is another little-known tax (often called a stealth tax) which often catches people out. The Insurance Premium Tax (IPT) is paid on almost all insurance policies here in the UK and brings in almost twice as much to the Treasury as inheritance tax. Since its introduction in 1994, it has gradually increased and currently stands at 12% (or, 10% for certain policies such as travel insurance). Sadly, there is not much you can do to reduce or eliminate this tax other than to try and lower your insurance costs, pay up-front (rather than monthly) and increase your voluntary excess – although this could cost you more in the event of a claim.
Ways to address stealth taxes
Working with a financial planner can be a great way to identify the latest stealth taxes that catch people out, and leverage the best tools at your disposal to mitigate them. Regarding income tax, for instance, you can limit how much income is taxed at the next tax band by keeping an eye on your earnings. Sometimes, increasing your pension contributions can be a good idea since they receive tax relief equivalent to your highest rate of income tax. For instance, if you earn £60,000 per year then you might put £9,729 straight into your pension (since earnings between £50,271 – £150,000 are taxed at the Higher Rate). This essentially gives a 40% “boost” to your pension rather than simply handing the money to the taxman. Another idea is to ask your employer to increase their contributions to your pension rather than raising your salary.
For tax on interest, it can help to put some of your cash savings into a cash ISA. Here, interest can be earned without tax. However, be careful not to commit too much of your £20,000 annual ISA allowance to cash, since ISAs also allow capital gains and dividends to be generated with no tax applied (investments may provide a better return than interest on cash). Another idea is to consider investing some of your cash into Premium Bonds. These offer the chance of winning a cash prize rather than a guaranteed interest payment, which means that any potential prizes are not subject to your Personal Savings Allowance.
Another important “stealth tax” to watch out for is the Lifetime Allowance. This places a limit on how much you can save into your pension(s) without a tax penalty. In 2022-23, anything taken as a lump sum over £1,073,100 will be taxed at 55% (or, 25% if taken as income). Here, some people can get “caught out” by the investment growth in their pensions over the years and find themselves in a difficult position with this tax. The best protection in this respect is to plan far ahead with a financial adviser to ensure you do not unwittingly breach your Lifetime Allowance. Other tools may be appropriate to help you, such as using a Lifetime ISA.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk