British families are already being hit by stealth taxes

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Britons await Thursday’s autumn statement with even more trepidation than usual. Less than subtle hints from ministers pointed to steep tax increases that would deepen the cost of living crisis.

What fewer may appreciate, however, is that due to the idiosyncrasies of the tax system, many people have been paying higher stealth taxes for years. Today, thanks to rising inflation, more and more families with relatively low incomes, especially those with young children, could face marginal tax rates well above 60%.

Family allowances, for example, used to be paid to families with young children, regardless of their parents’ income. During a previous period of government austerity in 2013, it was decided to claw back benefits from families with one parent earning more than £50,000 ($59,000). This threshold has remained unchanged for nearly a decade, but bites harder in 2022 due to accelerating inflation. This phenomenon is a complex variation of the tax brake, meaning in this case that if tax thresholds do not rise with inflation, more taxes are paid even by those who are not better off in real terms. .

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

Consider a couple where one parent earning £50,000 receives a sub-inflation income boost of 2% or £1,000. Some £346 of that increase will go straight to additional income tax, £51 will go to National Insurance and on top of that they will lose the £113 child benefit. In total, of the £1,000 increase, £510 or 51% would go 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 is almost 59%. For those with three or more children, the rate is 66%.

It should also be noted that a married couple earning £50,000 a year each (£100,000 between them) will receive the full child benefit, while a family with one parent staying at home and the other earning £50,001 will begin to have part of their benefit clawed back. The allowance will be completely lost once the individual’s income reaches £60,000.

Luckily, there are a few things you can do to lessen the impact of this stealthiest tax. The most direct is to increase your pension contributions to reduce your assessed income for child benefit purposes. Not only do you get tax relief on pension contributions, but you can also recover some or all of the lost child benefit.

Obviously, making larger pension contributions in these austere times might be unaffordable, especially with three kids and a non-working spouse. So make sure that even if you can’t avoid benefit clawbacks, you claim at least the National Insurance (NI) credit available to maintain the non-working spouse’s right to full state pension. This credit, worth more than £820 a year, can even be awarded to a grandparent if they play an important role in caring for their grandchildren. The key issue here is that if you are not receiving Child Benefit, the NI credit is not automatic – it must be claimed.

For low-income families not affected by Child Benefit clawback, but perhaps even more struggling, it is usually possible to transfer £1,260 of the personal income tax relief from a spouse who is not not work to the working partner. This can potentially save £252 per year. Again, it’s not automatic, you have to claim it.

And these are far from the only tax anomalies. Since 2009, those earning over £100,000 a year have had their personal income tax deductions 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 their entire tax allowance.

Again, making additional pension contributions is a good option to reduce your taxable income – and for those earning over £100,000 this 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 complicate things for everyone. Many low-income people end up paying far more tax than necessary or not receiving a benefit to which they would otherwise be entitled, often both.

Unfortunately, especially during times of rapid inflation, such tax strategies are the gift that governments continue to give, generating additional revenue without having to raise tax rates. .

As an old Morgan Stanley ad said, “You have to pay taxes. But there is no law that says you have to tip.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.

More stories like this are available at bloomberg.com/opinion

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