What is stealth tax? Definition and examples

Stealth tax refers to taxes or charges that may not appear immediately apparent to the taxpayer. Originally coined by the UK Conservative party in the 1990s, governments use stealth taxes to raise tax revenue without explicitly increasing official or headline tax rates. On this page, we explain the definition of stealth tax, how stealth taxation can affect your savings and pension, and some examples of stealth tax.

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Stealth tax is when the government indirectly increases the tax that taxpayers pay without explicitly labelling it as a tax hike. It can help governments raise tax revenue while avoiding public backlash, as taxpayers are generally unaware of the tax burden they are shouldering.

Stealth tax can refer to taxes not obvious to the person paying them, such as VAT. Tax freezes are another example of stealth tax, where taxpayers end up in higher tax brackets thanks to their income rising yearly. We’ll go into more examples of these and other stealth taxes below.

A stealth tax on pensions occurs when the government changes pension systems and diminishes the value of pension benefits or retirement savings without directly introducing a new tax. This can happen in several different ways.

For example, the UK government has frozen the income tax personal allowance at £12,570 until 2027/28. This freeze means that more pensioners will end up paying income tax, as the ‘triple lock’ guarantees that the state pensions will continue to increase yearly.

As another example of a stealth tax that may affect pensioners, the threshold for inheritance tax has been frozen until April 2030. This means that as property values rise over the next five years, more estates will be subject to this tax.

There are a number of examples of stealth tax in the UK. These include:

When people talk about stealth tax in the UK, they usually mention VAT. Introduced in 1973, VAT (Value Added Tax) is added to most goods and services sold by VAT-registered companies. Since 2011, the VAT rate has been 20%. For consumers, this VAT becomes part of the price when we buy an item (a pint of milk, for example) and therefore, it’s easy to forget you’re even paying a tax.

Another example of stealth tax is when the government freezes a tax band. As mentioned above, the income tax personal allowance has been frozen at £12,570 until 2027/28. Similarly, the higher-rate tax band (40%) remained fixed at £50,271 in 2024. Therefore, if you’re a taxpayer who receives yearly pay increases, you may find you end up paying more tax or even being pushed into the next tax bracket.

Taxpayers will have to wait until the Spring Statement to find out whether the Chancellor of the Exchequer, Rachel Reeves, freezes income tax limits beyond the financial year 2027/28.

Another example of stealth tax is insurance premium tax (IPT), a lesser-known UK tax that adds 12% to the price of car, home, and pet insurance and 20% to travel insurance. Like VAT, taxpayers aren’t typically aware they are paying a tax because it’s incorporated into the total price.

In general, taxpayers consider stealth tax to be covert and non-transparent. Taxpayers want to know exactly what taxes they are paying and what this money is spent on. It can be frustrating to realise you didn’t know you were paying a tax - for example, with VAT or insurance premium tax. Covert taxes can lead to a lack of trust in the government.

Hidden tax is often used interchangeably with stealth tax, but it generally refers to a tax being ‘hidden’ because it is included in the price. Examples of hidden taxes are indirect taxes, corporation taxes, and tariffs.

For example, when you buy petrol in the UK, you’ll pay excise duty (53p per litre, as of 2024) plus VAT (20%), which is included in the final price. The UK has one of the highest tax rates on petrol in Europe.

Fiscal drag happens when tax thresholds are frozen while income goes up, leading to a taxpayer’s taxable income increasing – even though tax rates themselves haven’t changed.

Since freezing tax thresholds raises overall tax revenue without taxation rates actually increasing, fiscal drag can also be considered to be a stealth tax.

Let’s say John earns £48,000 per year. The UK’s basic income tax rate is 20%, meaning John pays 20% tax on his income between £12,570 and £48,000 (2024/25). Inflation pushes wages up, and John receives a pay rise of 5%, bringing his annual salary to £50,400. He’s now in the higher tax bracket, paying 40% tax. In this example, income tax thresholds remain frozen and have not been adjusted in line with inflation or tax growth.

Before his pay rise, John paid £7,086 in tax per year, and after his pay rise, he will pay £7,592. Additionally, because of inflation, John will see an overall reduction in the purchasing power of his money. This would be an example of stealth tax through fiscal drag, as a significant portion of John’s pay rise is lost to taxes and fiscal drag has overall reduced the benefits of his change in salary.

Fiscal drag is generally considered bad for individuals but good for governments. As we saw in the example above, as wages rise, people can be pushed into higher tax brackets and have more of their income taxed, even though the real purchasing power of their money has not increased.

On the other hand, fiscal drag can help the government raise tax revenue without officially increasing taxes or implementing new laws or regulations. Plus,, the government can collect more taxes as more people move into higher tax brackets, which can be spent on public services and debt reduction.

Stealth tax on savings refers to the hidden or indirect erosion in the value of your savings over time, thanks to inflation, high interest rates or stealth taxation policies. An example of stealth tax on savings could see more savers having to pay tax on their savings interest due to increasing interest rates and frozen tax thresholds. The personal savings allowance means basic-rate taxpayers can earn up to £1,000 in interest tax-free (£500 for higher-rate taxpayers), but more savers are earning interest that pushes them beyond this limit.

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