Watch out for these stealth taxes

The Conservatives have been eager to convince us they're the party of lower taxes for the middle classes, but a variety of stealth taxes would suggest otherwise.

The key tenet of the Tory party manifesto was to give hard-working people more of their money back in their pocket. As part of this, the government has pledged to increase the threshold at which 40% higher rate tax is due to £50,000 as well as allowing people to pass on a family home worth up to £1 million tax-free.

But smaller, less publicised changes have pushed up taxes by a couple of pounds here and there, creating a level of stealth taxes that you don't even know you're paying.

This includes things like a hike in insurance premium tax, which goes up from 6% to 9.5% in November. This means contents, building and motor insurance will all be more expensive from the end of the year.

Cutting the amount of money that can be saved into a pension over your lifetime is also being cut to £1 million next year. While this may sound like a lot of money, it's not actually difficult to reach if you start early, save regularly, and invest wisely. In fact, £1 million will buy just £25,000 a year in income if used to purchase an annuity, which probably isn't as much as people think it is.

This is a stealth tax as it reduces the amount of tax relief you can receive on your pension contributions. And this is set to drop even further if rumours are correct about the government's plan to slash the rate of pensions tax relief for 40% and 45% taxpayers.

Income rates

The further stealth tax that accountants already have their eye on is to do with a potential merger of national insurance and income tax. Strangely, national insurance rates are reversed so the more you earn the lower NI becomes: for example you pay 12% NI on earnings between £8,060 and £42,385 but 2% after. Whereas when you hit the £42,385 for income tax purposes, your income tax goes up from 20% to 40%.

By merging the confusing rates, accountants are concerned that the government would use it as an opportunity to tinker with thresholds and we could all end up paying more tax under a single rate.

We may not be able to avoid stealth taxes altogether so we have to do the next best thing and make sure we take advantage of all the tax breaks that are open to us each year.

Read more:

Why we should merge income tax and NI

The end of national insurance - what next?

Let's ditch national insurance to make tax clearer