How Stealth Taxes Sneak Cash Out Of Your Pay Packet

Prime Minister David Cameron make have made an election pledge to ease income tax, but he has failed to address some of the stealth taxes that take a big bite out of salaries.

The Tories have promised to life the top rate tax band to £50,000 to push nearly a million higher rate tax payers back into the basic rate band.

They also want to life the personal tax-free allowance to £12,500, leaving many lower earners with more cash in their pay packets.

However, Cameron remains quiet about other taxes that make a real difference to earnings.

Inheritance tax (IHT) is an increasing problem for homeowners, especially in London and the South East.

House prices and tax

IHT is charged at 40% above the nil-rate threshold of £325,000, and with an average house value of around £500,000 south of Watford, it’s a tax that concerns millions of ordinary earners.

The Treasury expects IHT to contribute £5.3 billion by 2018 – almost doubling the tax take in recent years.

Rising house prices also impacts on stamp duty. As government-backed schemes help more first time buyers on to the property ladder, most sales generate at least a 1% tax bounty based on the value of the home.

Buyers have enough problems raising a deposit and do not realise they are subsidising the financial assistance they receive from the government by paying stamp duty.

Stamp duty raised £6.4 billion last year – and most of the tax originated in London, again because of higher prices in the capital.

NIC nicks extra cash

Taxing savers seems an odd policy when the Chancellor George Osborne has done so much to give retirement savers tax relief on ISAs and pensions – slamming a 20% tax on savers with cash in the bank doesn’t sit right with encouraging workers to save for their retirement.

National Insurance Contributions (NIC) gives the Treasury one of the biggest tax boosts.

Regardless of how governments manipulate tax, NIC adds 12% to the Treasury’s slice of a basic taxpayer’s wages.

That’s 32% going straight into government coffers. The money is meant to go on state pensions and the National Health Service, but in reality it’s cash flow for the government and offsets interest on borrowing.

Other NIC and tax rules distort the tax take on higher earners – for 40% tax payers it’s more like 50% and for 45%, depending on how much more than £100,000 they earn, anything up to 62%.

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