Many people unknowingly pay taxes that aren’t immediately obvious – from VAT (Value Added Tax) to recently extended tax freezes.
These are often labelled as ‘stealth taxes’, subtle charges that, while not as visible as Income Tax on your payslip, still influence your take-home pay and cost of living.
In essence, a stealth tax is an indirect hike in lesser-known tax obligations. The term ‘stealth tax’ is largely a media creation, referring to taxes that aren’t front of mind for most individuals, yet still have a noticeable financial impact.
Stealth taxes come in various forms, including indirect taxes like VAT, frozen tax thresholds, and lesser-publicised charges such as Insurance Premium Tax.
Perhaps the most familiar example is VAT, a charge added to most goods and services provided by VAT-registered businesses.
When you’re shopping, you may not realise you’re paying tax, as it’s built into the final price. The standard VAT rate in the UK stands at 20%, though some items and services are exempt or subject to reduced rates.
Since Rachel Reeves took over as Chancellor, we’ve seen more frequent tax freezes be speculated and this is another form of stealth tax
She has already confirmed an extension of the freeze on Inheritance Tax thresholds until 2030.
While this may appear harmless at first, it becomes more problematic if your salary increases annually. Due to something known as fiscal drag, even modest pay rises can push you into a higher tax bracket, increasing the portion of your income that is taxable.
Another form of stealth tax which isn’t as well known is Insurance Premium Tax which is a charge applied to many insurance products, including car, home, and pet cover.
This tax stands at 12% and is included in the total cost of your policy. Travel insurance attracts an even higher rate of 20%, which is added to the cost of your holiday or trip.
For savers, tax allowances such as the Personal Allowance and Personal Savings Allowance offer some protection.
Currently, the standard Personal Allowance stands at £12,570 – the amount of income you can earn before tax applies. Once your income surpasses this limit, you’ll be taxed at the appropriate rate.
The Personal Savings Allowance allows most people to earn up to £1,000 in interest tax-free, depending on their Income Tax band. This applies to interest earned through banks, building societies, credit unions, and trust funds.
However, rising interest rates and static tax thresholds mean more people could end up paying tax on their savings. With UK interest rates currently at 4.25% – more than double the Government’s 2% target, the tax-free benefit of these allowances is diminishing.
While a potential cut in interest rates is on the table when the Bank of England meets this week, any reduction is unlikely to bring rates close enough to the target to eliminate tax liabilities on savings.
Retirees drawing from their pensions also need to be cautious, as Government policies can significantly affect the value of their retirement funds.
With the freeze on Income Tax thresholds in place until 2028, more pensioners are being drawn into higher tax brackets. As pension payments increase, a growing number are now subject to the 40% tax rate.
Additionally, from April 2027, the Government plans to include unused pension funds as part of a deceased person’s estate, potentially pushing the estate above the Inheritance Tax threshold and increasing the likelihood of a 40% tax liability.
Understanding your financial position is key. These under-the-radar taxes are affecting people’s salaries, pensions, and savings more than ever. It’s a good idea to seek advice from financial and tax professionals who can help you build a plan to manage these impacts effectively.
With Chancellor Rachel Reeves expected to introduce further fiscal changes in the Autumn Budget, preparation is crucial.
Speak to our team for clear, practical guidance and support tailored to your circumstances.
