UK ‘stealth taxes’: How does this affect my finances?
Unsuspecting taxes that you often pay without realising, such as VAT (Value Added Tax) and the more recent tax freezes, are commonly referred to as ‘stealth taxation’.
These are charges that may not be as clear to you as the Income Tax in your payslip, but they do have impact your cost of living and monthly take home pay.
Essentially, stealth tax is an indirect increase to lesser-known UK tax rates. ‘Stealth tax’ itself is a turn of phrase, created predominantly by the press to describe the tax rates, which a taxpayer may not be as familiar with.
What are the common forms of stealth tax?
The common forms of stealth tax include indirect taxes, such as VAT, freezes on tax bands and rates and lesser-known tax charges, like Insurance Premium Tax.
Typically, the most well-known of the stealth taxes, VAT is as its name suggests, a tax rate added to goods and services usually sold by companies that are VAT registered.
You may not even realise when you’re doing the weekly shop or filling up the car, you are inadvertently paying tax simply because the VAT is included in the total price. The main rate of VAT in the UK is currently 20 per cent, but there are exemptions for a range of products and services.
Another avenue that may be classified as stealth tax are tax band freezes. We’ve already seen since Rachel Reeves became Chancellor, an extension to the freeze on the main rates of Inheritance Tax until 2030.
Currently, Income Tax remains frozen until 2027/28 but there is wide expectation that will be extended by the Chancellor in the upcoming Autumn Budget.
Either way, this isn’t good for taxpayers especially if you receive annual salary increases because the continued freezes alongside an increase in pay each month, means you may be liable to pay more tax and even pushed into a higher tax bracket. This is a process commonly referred to as fiscal drag.
It’s not just increased salaries that are affected by stealth tax as another example is found on many insurance policies.
Known as Insurance Premium Tax, this a 12 per cent tax on the price of your car, home or pet insurance, which is accounted for in the total price of your policy.
It is also applied to travel insurance at a 20 per cent rate, which is incorporated into the total price of your holiday or trip.
How do ‘stealth taxes’ affect pensions?
If you’re retired and living off your pension, you need to be aware of any changes made by the Government as they could have detrimental effect on your pot.
With Income Tax currently frozen until 2028, this increases the risk of you paying a higher tax bill. The frozen allowances and current tax thresholds mean more pensioners are breaching the 40 per cent rate.
In addition to this, the Government will be targeting unused pensions from April 2027, classifying them as part of your estate, again increasing the value of your estate, increasing the risk of paying inheritance tax.
How do stealth taxes affect my savings?
Most people will earn interest from their savings without paying tax. The allowances in place include Personal Allowance and Personal Savings Allowance.
The standard Personal Allowance is £12,570 which is the amount of income you don’t have to pax tax on but if your allowance surpasses this figure, you will be taxed at a certain percentage rate.
There is also the Personal Savings Allowance in which you may get up to £1,000 of interest and not have to pay tax on it but this is dependent on which Income Tax band you are currently in.
This allowance applies to interested covered by multiple avenues including banks and building society accounts, savings and credit union accounts and trust funds.
However, while these allowances are in place, there is a high risk you could end up paying more on your savings because of increasing interest rates and frozen tax thresholds.
Interest rates in the UK currently sit at 4.25 per cent, over double the Government’s 2 per cent target.
However, the Bank of England are continually monitoring interest rates in the UK and are due to announce potential interest rate cuts when they meet later this week.
While a cut will be good, it won’t be anywhere near the Government’s target meaning your savings remain a taxable prospect even with the personal savings allowance in place.
What’s the best approach to managing stealth taxes?
Its important you understand your financial position and how these coined stealth taxes are affecting your salary, pension and savings. Speak with finance and tax experts who can advise and support you.
They can help you put a plan in place to manage these taxes and understand what is to come with Chancellor Rachel Reeves expected to announce further tax changes in the Autumn Budget later this year.
There has never been a better time to plan, get in touch with our team for sound financial advice and support.
