Are stealth taxes back?
One reputation that the last Government had was for so called ‘stealth’ taxes. Increases in taxes that weren’t really announced, weren’t really obvious. It was a continual criticism from the Conservatives of Gordon Brown and the Labour party.
So it comes as a disappointment that current proposed changes in the tax system amount, in my view to a similar approach, with rises in tax that aren’t obvious and certainly haven’t been made clear. To explain, I’ll have to run through some numbers, so bear with me.
Stealth tax 1
In April, it is currently proposed that the personal tax free allowance is to increase from £6,475 to £7,475 with the idea of the benefit of this being limited to basic rate taxpayers by ‘squeezing’ the band at which 20% tax is paid. All well and good, with tax cuts limited to the lower paid. But, the current proposals are that the 20% band is reduced from £37,400 to £35,000 which is MORE than it should be if the only intention is to limit the tax cut to the lower paid. That would only require the tax band to be reduced to £35,400. Don’t believe me?
Now: Someone earning £43,875
First £6,475 Personal Allowance, tax free
Next £37,400 @ 20% = £7,480 tax
Total tax £7,480
Current proposals: Someone earning £43,875
First £7,475 personal allowance, tax free
Next £35,000 @ 20% = £7,000
Last £1,400 @ 40% = £560
Total tax £7,560
So tax has increased by £80. OK, that’s not much but it comes on top of the proposed 1% increase in NIC and it hasn’t been announced. Did YOU know?
Stealth tax 2
Things get worse for those on higher salaries. As you may know, on incomes above £100,000 the Personal Allowance gets withdrawn at a rate of £1 for each £2 taxable earnings. Whilst the PA is being withdrawn in this way, your income is effectively being taxed at 60%. With the increase in the Personal Allowance to £7,745, the band at which the marginal rate is 60% has widened. Anyone paying taxes at that level faces a tax increase as an allowance they don’t actually get is withdrawn! Don’t believe me?
Now: Someone earning £114,950
First £37,400 @ 20% = £7,480
Next 77,550 @ 40% = £31,020
Total tax £38,500
Current proposals: someone earning £114,950
First £35,000 @ 20% = £7,000
Next 79,950 @ 40% = £31,980
Total tax £38,980
An increase in tax paid of £480. And if current proposals to increase the Personal Allowance to £10,000 are followed and the basic rate band continues to be squeezed, it would mean an increase in tax payable of £1,490 for someone currently earning £120,000. That’s the equivalent of raising the 40% tax rate to 41.6% for that person.
Now, you may say someone on that income can afford it but if the Government wants to raise extra tax from such people, shouldn’t they say so? And set out in clear terms what is happening? Tax increases are seldom welcome, but hidden tax increases are even worse.Talk to Barnes Roffe today