How could stealth taxes affect your wealth in 2024?

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

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 subsequently, 2022 presented a fresh set of challenges. These included soaring inflation, rising interest rates, stock market fluctuations and high energy prices.

Although 2023 saw a cooling off of some of these elements, like inflation, interest rates have increased throughout the year and remained at these high levels since August, while 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 2022/23 tax year, HMRC reports it took more than £788 billion in taxes, a 10.2% increase on the previous year. What’s more, the Institute for Fiscal Studies (IFS) forecasts that HMRC receipts may reach £950 billion by the end of 2023/24 – another sharp rise.

Of course, with normal consumer activity dampened due to lockdowns in 2020 and 2021, it is unsurprising that tax revenue increased in 2022/23, and may continue to rise to this day. 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.

What is a stealth tax?

“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.

Seven 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 on the Personal Allowance.

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

In the past three years, the Personal Allowance has risen by just £270. The table below 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.

Source: HMRC

2. 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 table above 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.

3. 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 could have been pulled into the additional-rate tax band this year, and even more could experience similar circumstances in 2024.

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

The higher-rate tax band has also remained fixed at £50,271 in 2023, meaning more people could become higher-rate taxpayers by 2028.

5. The Capital Gains Tax Annual Exempt Amount was reduced in April 2023 and is set to fall again in 2024

You usually pay Capital Gains Tax 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.

But in April 2023, Chancellor Jeremy Hunt decreased it to just £6,000. What’s more, it is set to halve to £3,000 in April 2024.

So, if your profits from capital gains have risen since the 2020/21 financial year, your CGT liability may have already risen.

Plus, now that the Annual Exempt Amount is set to decrease again next year, your CGT liability could rise even further.

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.

6. The Dividend Allowance has been cut in 2023 and will halve again in 2024

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

Indeed, starting in April 2023, the Dividend Allowance was cut from £2,000 to £1,000. In April 2024 it will drop to just £500.

This stealth tax is likely to have already had an impact on those who earn dividends, and will continue to affect these earners next year.

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

Inheritance Tax (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 2009.10 tax year, the nil-rate band has been fixed at £325,000. This covers all taxable assets.
• Since 202/21, the residence nil-rate band, which applies to property passed to direct descendants, has been £175,000.

Both of these have now been frozen until 2028.

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 likely to happen at the end 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.