Stealth Tax
You may have noticed the term ‘Stealth Tax’ getting more of an airing across the press recently, especially so since Jeremy Hunt’s Autumn Statement back in November 2022. Keep an eye out again for more, over the next week, when we have the next Budget announcement (15th March 2023).
The Cambridge Dictionary explains ‘Stealth Tax’ as “a new tax that is collected in a way that is not very obvious, so people may not realise that they are paying it”. Often it is seen as a way for governments to increase tax revenues without needing to bring in new, or even increase existing, tax rates.
An example of some of these from just that recent statement include:
Income Tax
The majority of people can earn the first £12,570 of their annual income free of income tax, the next £37,700 at 20% tax and anything over £50,270 pa at 40%. These levels have now been frozen at these rates until 2028.
Whilst on the face of it this may seem like business as usual, it actually means a lot more people may now have to start to pay, or pay more, tax on their income.
Even assuming that the recent ~ 10% inflation rates won’t stay around forever, it is expected that over time that the cost of living will continue to increase. If we expect our income levels to increase in line with this, which you would hope would be the case over the next five-year period, then you are left in a situation where many may move from 0% to 20% or from the 20% to 40% tax bands.
In this situation, the government increases its tax take and you could potentially be left in a worse position in real terms, as your newly taxed income does not even cover the increase in the new cost of living.
Higher earners should also be wary of the rather large cut in the additional rate tax band. Currently, those earning over £150,000 pa pay income tax at a rate of 45%. However from the 6th April 2023 the 45% tax charge will start to come in for those earning over £125,140 pa. Thus bringing more people into additional rate tax and increasing tax take from those higher earners.
Dividend Income
Based on current rules, individuals can receive up to £2,000 in dividend income free of tax. However, this is being reduced to £1,000 from the 2023/24 tax year and halved again to £500 in 2024/25.
Again, another example of no new taxes or increase in tax rates, but how a simple tweak to allowances can bring a lot more shareholders into taxable income and increase tax receipts for the government.
Capital Gains Tax
The current tax-free allowance for capital gains is £12,300 – this is the amount of gain you can generate in a tax year when selling investments (or a rental property!) before paying any tax. This is also being reduced soon; down to £6,000 from the 2023/24 tax year and halved to £3,000 in the 2024/25 tax year. With similar consequences as the dividend changes above.
Things to be aware of?
Ensure you are sensible with the use of your respective allowances each tax year and where possible make the most of them; this could include utilising your ISA and CGT allowances and ensuring your assets are held as tax efficiently as possible.
You may now fall into the requirements for tax returns! As more of us hold potentially taxable assets it could lead to you having to now declare and pay tax on these.
Now could be the time to sort out and tidy up those rogue share holdings; especially so if you hold them as physical paper copies. Keeping an eye on the dividends could be more important if it now means you are at risk of exceeding your dividend allowance.
And finally – just to be aware that we can help you on all of the above!