If you’re an investor or have UK taxpayer status, “stealth tax” might be a familiar term, and an unpleasant one. It is a type of tax that is not announced, but it can slowly chip away at the hard-earned money you make.
In the last few years, the Government in the UK has increasingly leaned on this approach to raise revenues while avoiding unwanted attention. Here, we look at what this subtle tax method can mean for investors as they work towards a prosperous financial future.
An overview of stealth taxes
In the UK, stealth taxes are engineered to raise revenue without being labelled as a straightforward tax hike. Instead, stealth taxes operate indirectly. They freeze thresholds, reduce allowances and adjust tax rules with the aim of effectively increasing how much tax people must pay. This is specifically relevant to investors, as these adjustments can compound over an extended period and significantly impact returns.
For example, fiscal drag involves tax bands staying static irrespective of inflation and drives more people into higher tax brackets. Similar instances are reductions to tax-free allowances for capital gains and dividends that impact investors every year.
Silent wealth erosion
Between 2022 and 2023 the dividend allowance was £2,000, but in 2024, this fell to £500, with more income from dividends taxed.
For the same period, capital gains allowance dropped from £12,300 to just £3,000, generating higher taxes on gains. Income tax thresholds were frozen and the nil-band rate for Inheritance Tax (IHT) remained unchanged, resulting in fiscal drag and increased taxes, and estates paying more IHT.
What makes investments especially vulnerable to stealth taxes?
In the UK, investments are disproportionately impacted by stealth taxes for many reasons. They erode allowances, as tax-free allowances for capital gains and dividends are counted among the earliest targets during a fiscal squeeze.
Inflationary pressures are also an issue, with returns only just keeping up with inflation, as an increase in tax eventually results in net losses for those investing.
As experts in tax planning in Cheshire and Oswestry, at Hartey Wealth Management, we help our clients mitigate the impact of stealth taxes. Get in touch with a member of the team today to explore how we can help.
