This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
A stealth tax is a clever way for the government to raise money from taxpayers without overtly calling it a “tax rise”. A direct tax rise – e.g. increasing the Basic Rate from 20% to, say, 25% – risks drawing a lot of negative headlines and potential punishment at the polls during the next election. By contrast, a stealth tax often passes unnoticed by taxpayers in the form of small adjustments or “freezes” to existing taxes and allowances.
The result for the government can be higher tax revenues without the aforementioned risk of criticism. Whilst many argue that stealth taxes can be necessary, we at Elmfield Financial Planning believe that taxpayers should still be aware of how these can affect their wealth and finances – helping them to plan effectively to reduce needless costs.
Below, we offer a short guide on three prominent stealth taxes in 2024, how they can affect taxpayers and ideas on how to address them. We hope these insights are useful. Please get in touch for more information or to discuss your financial plan with us.
Stealth Tax 1: The Personal Savings Allowance
In the UK, most people are entitled to a Personal Savings Allowance (PSA) which allows them to generate tax-free interest (e.g. from cash) outside of their ISAs. For a Basic Rate taxpayer, the threshold is £1,000 per tax year. For someone paying the Higher Rate, it is £500. An Additional Rate taxpayer does not get a PSA.
These tax-free thresholds have remained unchanged since the introduction of the PSA in April 2016. However, inflation has risen since that time – driving up the cost of goods and services. Unless the PSA thresholds also rise with inflation, savers face the erosion of their “spending power” from savings. However, the sad story does not end there.
Since late 2021, interest rates have also been rising as the Bank of England (BoE) has battled to subdue escalating inflation. This has led to many banks offering higher interest rates to savers (a welcome development). However, higher interest payments also bring the risk of taxpayers inadvertently breaching their PSA for the first time.
For instance, in December 2021 it was possible to hold over £100,000 in cash savings and not pay any tax on interest (because rates were so low). Today in 2024, an individual could breach their tax-free threshold with savings of £20,000 or even less. Here, it is important to explore some tax planning options with a professional – such as Premium Bonds and/or a Cash ISA – to ensure you do not pay more tax than necessary.
Stealth tax 2: Inheritance Tax
Inheritance tax (IHT) is typically levied at 40% on an individual’s estate once it exceeds £325,000 in value. The tax-free threshold here has been frozen until April 2028, despite rising inflation and property prices.
This “stealth tax” – or “freeze” – means that more people will likely end up paying IHT due to increasing asset values, perhaps even without realising it will happen. This is backed up by figures from HMRC which shows IHT receipts increasing by millions year-on-year. Make sure your estate is not caught out. With a robust estate plan, it is still possible to mitigate an IHT liability using a range of financial planning tools (e.g. gifts and trusts).
Stealth Tax 3: Income Tax
This is arguably the most prominent stealth tax for UK households to be aware of in 2024. Recently, the Chancellor confirmed that income tax bands would remain frozen until at least 2028. Between now and then, average UK wage growth is expected to keep rising each year. This means that more taxpayers are set to cross into higher tax brackets in the coming years. Indeed, 20% of taxpayers are forecast to pay the 40% Higher Rate by 2027 if current trends (and Income Tax thresholds) continue.
As mentioned in our supplementary article, one of the best ways to protect yourself from entering a higher tax bracket is via salary sacrifice. For instance, instead of asking for a pay rise, you could request that future increases go straight into your pension (via employer contributions). This can help to save on National Insurance, grow your future retirement fund and preserve certain other allowances – e.g. your £1,000 PSA, if you are a Basic Rate taxpayer (remember this shrinks to £500 if you start paying the Higher Rate).
There are other options to explore too, in many cases. Certain couples could claim the Marriage Allowance, enabling savings of up to £252 per year in Income Tax. Donating to charity can also be a viable strategy. Gift Aid, in particular, allows certain taxpayers to “extend” their Basic and Higher Rate tax bands by their gross charitable donations. This can allow for more of your income to be taxed at a lower rate.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
