Welcome to the second part of our Stealth Tax blog series! Last week, we explained what “Stealth Tax” was and how it impacts on an individual’s estate via Inheritance Tax. This week, we will be looking at how Stealth Tax can have an impact on your income.
Income Tax is usually scrutinised in every budget, and we have seen many changes over the years in the way in which policy has been implemented on income, including changes in rates, changes in National Insurance Contributions (NICs) and movement of the thresholds. Let’s have a look at how stealth tax has come into effect.
Freezing the Threshold for Income Tax
The Personal Allowance is how much we are allowed to earn before we pay any income tax. Over the course of the past decade, this has increased considerably and now sits at £12,570 for 2022/23. On top of this, the threshold to pay higher rate income tax at 40% is £50,270 for 2022/23. Whilst we have become accustomed to these thresholds increasing, it was announced last year that they would be frozen until 2026.
The announcement of the freeze was before the cost of living crisis became prominent, but what it suggests is that not only will our income afford less goods and services, but will also not benefit from the increases in income tax thresholds that we have taken for granted in recent years.
Other freezes of note in this remit include the tapering of the personal allowance for anyone earning over £100,000, where the personal allowance will reduce by £1 for every £2 over this amount, resulting in an effective rate of 60% income tax for some people. In a similar fashion, child benefit is also reduced if just one parent is earning over £50,000, a figure that has not changed since its introduction in 2013, despite increasing costs in childcare and inflation generally.
Utilising ISA allowances and pension contributions becomes more important as part of tax planning and wealth preservation, but there are other tax efficient strategies that can be considered to help mitigate income tax liabilities.
In next week’s edition…
What you need to be aware of with regards to your pension and retirement planning. How much are you allowed to save? What factors do you need to consider? This will be discussed in our next blog.
Are you likely to be caught out by stealth tax?
At Alexander Grace, we want to help people to understand their financial position and put them in a better place. Your money matters to you and therefore it matters to us to ensure you make the most of it. With much of the events of the world today, stealth tax isn’t particularly forthcoming, and it can become increasingly difficult to monitor your own position. As Independent Financial Planners, we can help you to build a tax efficient strategy, helping to preserve and grow your money in line with those important financial objectives for you and your family.
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