How could stealth taxes affect your wealth in 2024?

man at desk tax planning

In the past four years, many aspects of your financial life may have changed.

The Covid-19 lockdowns offered savings opportunities for many households, but the last two years have presented a fresh set of challenges. These include soaring inflation, rising interest rates, stock market fluctuations, and high energy prices.

Although recent months have seen a cooling off of some of these elements – for example, inflation falling – interest rates have remained at a 15-year high since August 2023, and market volatility has prevailed in some areas.

With all these factors to contend with, you may not know that HMRC’s takings are also increasing.

In the 2023/24 tax year, HMRC reports it took more than £827 billion in taxes, a 5% increase on the previous year. What’s more, the Office for Budget Responsibility (OBR) expects tax receipts to break the £1,000 billion barrier in 2024/25.

In a growing economy, it is unsurprising that tax revenue is increasing. However, there is another factor to consider here: a phenomenon known as “stealth taxes”.

Read on to find out what a stealth tax is, and seven examples of stealth taxes that could affect your finances in 2024.

“Stealth taxes” describe an indirect tax increase that many people don’t know about

You could be wondering: “If I’ve not entered a higher tax bracket, and the actual rate of tax hasn’t increased, how could my tax bill be rising?”

The answer here lies in the amount you earn before you pay any tax. There are various exemptions and allowances under which you don’t usually pay any tax, such as the:

  • Income Tax Personal Allowance
  • Capital Gains Tax (CGT) Annual Exempt Amount
  • Dividend Allowance
  • Inheritance Tax (IHT) nil-rate bands.

Crucially, the government has frozen or reduced not just one, but all of these tax-efficient allowances and exemptions, and more that we’ll explore below. Freezing and reducing thresholds like these is a subtle way to increase taxation: if you earn more, a larger portion of your wealth falls into the taxable bracket.

That’s why these are known as “stealth taxes”. Stealth taxation is a way for the government to receive more in tax without a person’s tax code, or tax rate, actually changing.

7 stealth taxes that could affect you in 2024

Now that you’re aware of what stealth taxes are, let’s take a closer look at how allowance and exemption freezes could affect your wealth in 2024.

  1. The Income Tax Personal Allowance has been frozen until 2028

Your Income Tax bill may have increased, or be set to rise in the immediate future, due to a freeze in the Personal Allowance.

The Personal Allowance marks how much a person can earn each year before paying Income Tax or National Insurance contributions (NICs).

Historically, the Personal Allowance would rise each year in line with the cost of living. However, the Personal Allowance has not risen since 2021/22. The below table shows the value of the Personal Allowance since the 2020/21 financial year. It is set to be frozen at its current level until 2028.

Allowances 2024/25 2023/24 2022/23 2021/22 2020/21
Personal Allowance £12,570 £12,570 £12,570 £12,570 £12,500
Income limit for Personal Allowance £100,000 £100,000 £100,000 £100,000 £100,000

 

Source: HMRC

Research from the London School of Economics (LSE) says that the effect of freezing the Personal Allowance is that an individual’s average tax rate will rise from 11.6% in 2021/22 to 13.6% in 2027/28.

  1. The Personal Allowance income limit has not risen either

For every £2 you earn over £100,000, the Personal Allowance reduces by £1. This means that the Personal Allowance disappears entirely when you earn £125,140 or more.

As the above table reveals, the income limit for the Personal Allowance has not changed either.

So, if you receive a pay increase, you’re more likely to lose access to the Personal Allowance than if it had risen each year.

  1. The threshold at which you begin paying additional-rate tax has been decreased

On top of the income limit and Personal Allowance freezes, the government has reduced the threshold at which earners begin paying additional-rate (45%) Income Tax too.

Previously set at £150,000, the government reduced the amount you can earn before paying additional-rate tax to £125,140 in the 2023/24 tax year.

As a result, more people will likely be pulled into the additional-rate tax band in 2024 and beyond.

  1. The higher-rate tax band is now fixed at £50,271

The income level at which individuals pay higher-rate (40%) Income Tax has also remained fixed at £50,271 in 2024.

According to a report from Professional Adviser, 1.13 million people could become higher-rate taxpayers by 2028 under this freeze, which was implemented by the chancellor in the 2022 Autumn Statement.

  1. The Capital Gains Tax Annual Exempt Amount has fallen twice since 2023

You are usually liable for CGT on profits you earn from selling:

  • Non-ISA shares
  • Properties that aren’t your main residence
  • Your main home if you’ve let it out, used it for your business, or it is very large
  • Business assets
  • Most personal possessions worth more than £6,000, excluding your car.

The CGT Annual Exempt Amount allows you to earn tax-free profits on capital gains, up to a certain amount.

Between 2020/21 and 2022/23, the Annual Exempt Amount was fixed at £12,300, rather than rising in line with inflation. However, in April 2023, Jeremy Hunt reduced it to just £6,000. He then halved it again, to £3,000, in April 2024.

Now that the Annual Exempt Amount is just £3,000, you could be liable for CGT on more of the profits you make.

This is especially important for current or future retirees – if you plan to cash in non-ISA shares or investments as part of your later-life income, preparing for a higher CGT liability is crucial.

  1. The Dividend Allowance has fallen twice since 2023

If you receive dividends as part of your remuneration, you may not be aware that the amount you can earn without paying Dividend Tax has fallen.

Since April 2023, the Dividend Allowance has been cut from £2,000 to just £500. That means you’ll likely be liable for Dividend Tax on more of the dividends you receive.

  1. The Inheritance Tax nil-rate bands are frozen until 2028

IHT is paid on some estates when an individual passes away. This is only the case if the value of their estate exceeds the IHT allowances known as the “nil-rate bands”.

While there are many rules surrounding IHT, including who pays it and how to mitigate it, what you need to know for now is:

  • Since the 2009/10 tax year, the nil-rate band has been fixed at £325,000. This covers all taxable assets.
  • Since 2020/21, the residence nil-rate band, which applies to property passed to direct descendants, has been £175,000.

Both of these have been frozen until 2028.

Unsurprisingly, as a result of these freezes, HMRC has taken an increased amount of IHT. MoneyAge reports that, in the 2023/24 tax year, families paid £7.5 billion in IHT, £400 million more than the previous year.

If you were to pass away in the next few years, these freezes could mean that your beneficiaries pay a substantial IHT bill, as opposed to if the nil-rate bands had been increased year-on-year.

A Kellands financial planner can help you navigate these stealth taxes

If you feel concerned about your tax bills rising across the board after reading this article, you’re not alone.

With professional insights on your side, you can prepare for any tax increases you face from the above cuts and freezes. We could even help you mitigate the effects of these stealth taxes where possible, enabling you to protect your family’s wealth more efficiently in the year to come.

With a general election coming in the second half of 2024, we can’t tell you what the future holds – but we can guarantee that our financial planners will support you every step of the way.

For more information about working with a Kellands financial planner, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

 

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