Households should act now to fight the effect of ‘stealth taxes’ which are set to cost us an extra £7.5 billion this year.
The shocking figure was revealed by the Daily Mail this week, and comes amid the sting of rising house prices, soaring inflation, and frozen tax thresholds.
When people’s earnings rise to combat inflation but tax thresholds are static, more people are pulled into higher tax brackets. This is known as fiscal drag.
Dragged down: When people’s earnings rise to combat inflation but tax thresholds are static, more people are pulled into higher tax brackets. This is known as fiscal drag
However, there are clever tricks ordinary people can use to lessen the impact — and they shouldn’t wait until the end of the next tax year.
Shaun Moore, from financial advice firm Quilter, says: ‘Do not sit on your hands — take charge of your finances today.
‘The various tax thresholds may not be as good for a long time to come.’
Here are some of the main tax drags — and what you can do about them.
Caught in a trap
Workers who receive only modest pay rises could find themselves in a tax trap.
People start paying a basic rate of tax at 20 per cent on earnings above £12,570. Once wages top £50,270, a higher rate of tax at 40 per cent applies. An annual income of more than £150,000 is taxed at 45 per cent.
In the past, these allowances have nudged higher as salaries have risen. But now they’re frozen until April 2026.
By that time, an extra two million people are likely to be in the higher-rate tax bracket, according to the Office for Budget Responsibility (OBR).
Former pensions minister Steve Webb, now a partner at financial consultancy firm Lane Clark & Peacock, calls the freezing of tax allowances and thresholds ‘the ultimate stealth tax’.
Action: Workers can keep out of the higher tax band by increasing their pension contributions. They’ll be paying their future selves and benefiting from tax-relief, too.
Sneaky hikes: Chancellor Rishi Sunak (pictured) is set to rake in an extra £7.5bn for the Treasury this year through a raft of stealth taxes
This method also helps parents receiving child benefit to avoid a high-income charge — a clawback of the benefit, paid to help with the costs of raising a child. It applies to incomes of more than £50,000, even though that sum still falls into the basic-rate tax band.
For example, someone earning £53,000 a year could pay £3,000 gross into their pension, leaving a net income of £50,000.
The pension contribution would also attract tax relief. There are always caps and caveats to be aware of, however, so do your homework.
In addition, those who earn below the taxable threshold can transfer £1,260 of their personal allowance to their basic-rate taxpaying spouse using the marriage allowance.
If you’re employed and spend your own money on work-related expenses, you can claim tax relief, too. This includes travel, and maintenance of tools or uniforms, for example. Self-employed workers should also ensure they claim tax relief for business expenses.
And take full advantage of Isa allowances, shielding your money from dividend tax on income from shares. The dividend allowance remains stagnant at £2,000 a year.
Moving costs: Property website Zoopla estimates that an extra 4.3 million homes are now in a higher stamp duty bracket since March 2020
Help with financial advice and planning
Inheritance tax receipts are expected to rise considerably over the next five years. Official OBR figures suggest that an extra £600 million will be raked in this tax year alone. It used to be seen as a tax on the rich, but less so now.
Sarah Coles, of investment platform Hargreaves Lansdown, warns: ‘Given rising house prices, more estates will have more inheritance tax to pay.’
Up to £325,000 of a person’s wealth escapes inheritance tax, and the same for property up to £175,000 if it passes to a direct descendent. For couples, these allowances double to make a package worth £1 million.
Action: Make use of all ‘exempt’ allowances. These annual spends are free of inheritance tax rules.
They include gifts to spouses and up to £3,000 a year for others. You can also make regular payments to someone from your normal income if you’ve covered your own expenses first. For more information about rates and allowances, visit gov.uk/inheritance-tax.
Billed to buy
An extra £1.5 billion is expected to be made from property taxes in the UK this year. Higher house prices catapult homebuyers into higher stamp duty rates.
Stamp duty for England and Northern Ireleand already increased £6.1 billion in the year to March, to £18.6 billion.
Property website Zoopla estimates that an extra 4.3 million homes are now in a higher stamp duty bracket since March 2020.
Action: First-time buyers can avoid stamp duty on the first £300,000 of a property worth up to £500,000. Usually, the tax kicks in on anything above £125,000.
Remember property taxes when buying and use the stamp duty calculator at gov.uk
Meanwhile, anyone who completes a purchase of a new home before selling their old one pays extra stamp duty.
This is because it’s classed as a second home. If the original property is sold within three years, a refund can be claimed.
On the house
Rising house prices have contributed to a meteoric rise in capital gains tax receipts for the Government.
This tax is owed on the profit when an asset increases in value — including second homes. Landlords trying to exit a stricter buy-to-let property market will be caught on the way out.
Everyone is entitled to an annual exemption of £12,300 — but this is frozen until 2026, by which time it will have cost us an extra £6.4 billion according to the OBR.
Action: Join forces with your spouse. Sean McCann, of insurer NFU Mutual, says: ‘Married couples can transfer assets between them, allowing them to realise up to £24,600 of tax-free gains each tax year.’
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