Bloomberg Tax
Nov. 15, 2022, 5:00 AM

British Families Are Being Hit by Stealth Taxes: Stuart Trow

Stuart Trow
Stuart Trow

Brits are awaiting Thursday’s Autumn Statement with even more trepidation than usual. Less-than-subtle hints from ministers have signaled sharp tax increases that would compound the cost-of-living crisis.

What fewer may appreciate, though, is that due to idiosyncrasies in the tax system, many people have been paying higher stealth taxes for years. Now thanks to rising inflation, more and more families on relatively modest incomes, especially those with young children, might be subject to marginal tax rates well in excess of 60%.

Child benefit, for example, used to be paid to families with young children irrespective of their parents’ income. During a previous bout of government austerity in 2013, it was decided to claw back the benefit from families where one parent earned in excess of £50,000 ($59,000). That threshold has remained unchanged for almost a decade, but bites harder in 2022 due to accelerating inflation. This phenomenon is a complex variation of fiscal drag, which means in this case that if tax thresholds fail to rise with inflation, more tax is paid even by those who are no better off in real terms.

In this instance, not only do people suffer from fiscal drag, but a valuable benefit is also withdrawn as both income and inflation rise. This means that many young families suffer marginal income tax rates significantly higher than any hedge fund manager or company executive.

Consider a couple where one parent earning £50,000 receives a below-inflation income increase of 2% or £1,000. Some £346 of that increase will go directly to additional income tax, £51 will go to national insurance and on top of that, they’d lose the £113 of child benefit. All told, of the £1,000 raise, £510 or 51% would accrue to the government. The more children you have, the greater the impact. The marginal income tax rate in this example for a couple with two children rises to almost 59%. For those blessed with three or more kids, the rate is an eye-watering 66%.

It is worth noting too that a married couple each earning £50,000 a year (£100,000 between them) will receive the full child allowance, whereas a family with one parent staying at home and the other earning £50,001, will start to have some of their benefit clawed back. The allowance will be lost altogether once the individual’s income reaches £60,000.

Fortunately, there are a couple of things you can do to mitigate the impact of this stealthiest of taxes. The most direct is to increase your pension contributions to lower your assessed income for child benefit purposes. Not only do you get tax relief on the pension contributions, but you also get to recoup some or all of the lost child benefit.

Clearly making greater pension contributions in these austere times might be unaffordable, especially with three children and a non-working spouse. So make sure that even if you can’t avoid the benefit clawback, you at least claim the national insurance (NI) credit available to maintain the non-working spouse’s entitlement to the full state pension. That credit, worth over £820 per annum, can even be assigned to a grandparent if they play a significant role in caring for their grandchildren. The key issue here is that if you don’t receive child benefit, the NI credit is not automatic — it must be claimed.

For lower-earning families unaffected by the child benefit clawback, but perhaps struggling even more, it is usually possible to transfer £1,260 of a non-working spouse’s personal income tax allowance to the working partner. This can potentially save £252 a year. Again though, this is not automatic, it must be claimed.

And these are far from the only tax anomalies. Since 2009, those earning more than £100,000 a year have had their personal income tax allowances clawed back at the rate of £1 for every £2 earned above the threshold. Worse still, the threshold has been unchanged for more than 13 years. Anyone earning £125,140 or more loses the entirety of their personal income tax allowance.

Here again, making additional pension contributions is a good option for reducing your taxable income — and for those earning more than £100,000, it might be a more realistic option. The sweetener is that the effective tax relief for those affected can be up to 60%. For these people, the government effectively contributes £60 for every £40 they pay into their pensions.

Stealth taxes make things more complicated for everyone. Many lower-earners end up paying far more tax than necessary, or not receiving a benefit to which they might otherwise be entitled, often both.

Unfortunately, especially during periods of rapid inflation, such tax strategies are the gift that keeps on giving for governments, raising additional revenue without having to increase tax rates. .

As an old ad for Morgan Stanley once claimed, “You must pay taxes. But there’s no law that says you have to leave a tip.”

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To contact the editor responsible for this story:
Nicole Torres at

© 2022 Bloomberg L.P. All rights reserved. Used with permission.

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