During any government fiscal event such as the Budget or Spring Statement, most of us are particularly interested in changes to tax legislation.
After all, tax increases ultimately mean that you retain less of your wealth, potentially making it more difficult to meet short-term financial obligations and save for the future. So, if the government doesn’t announce any changes to tax thresholds or rates, you might assume this is good news.
However, even if certain tax rules don’t change, you could still end up paying more because of “stealth taxation” – an indirect increase in tax, which often goes unnoticed.
Read on to learn more about how stealth taxes work and some ways to potentially protect your wealth.
Frozen Income Tax thresholds could mean more of your wealth is pushed into the taxable range
Freezing tax thresholds is one of the more common ways the government increases revenue without directly raising taxes.
For example, in 2025/26, the Personal Allowance for Income Tax is £12,570. This means you won’t pay any tax on the first £12,570 of your earnings each year.
The Personal Allowance first increased to this level in April 2022.
According to Statista, the average annual wage for a full time worker in the UK in 2022 was £33,061. After the Personal Allowance was applied, this would mean the average earner paid Income Tax on the remaining £20,491 of their salary.
As a basic-rate taxpayer with a marginal rate of 20%, this would mean they paid £4,098.20.
However, by 2024, the average UK worker was earning £37,430, while the Personal Allowance remained the same.
This meant that a larger portion of their earnings was pushed above the threshold. As such, they paid £4,972 in Income Tax.
Ultimately, as the Personal Allowance threshold hasn’t increased in line with wage growth, you’re likely paying a higher percentage of your earnings in Income Tax, even though the tax rate hasn’t increased.
This is known as “fiscal drag” and likely affects most employed people.
What’s more, the chancellor confirmed that the Personal Allowance will remain at its current level until April 2028, meaning the effect of stealth taxes could be more pronounced in the future.
Additionally, as the State Pension amount increases annually – in 2025/26, it is £11,973 a year – it is close to reaching the Personal Allowance and could exceed it soon. This means you may be more likely to face a significant Income Tax bill in retirement.
Important Inheritance Tax thresholds also remain frozen, meaning your family could pay more tax on your estate
As well as the Income Tax you might pay now and in retirement, you may want to consider the Inheritance Tax (IHT) your family might pay in the future. Unfortunately, frozen tax thresholds could mean your family faces a large bill.
The IHT “nil-rate band” is the amount you can pass to your beneficiaries before triggering a tax charge.
This has been frozen at £325,000 since April 2009. According to ii, if the threshold had risen in line with inflation, it would now be £517,007.
As house prices rise and you generate growth on your savings and investments, the value of your estate will likely rise. While the nil-rate band remains frozen, this could mean more of your estate is pushed into the taxable range and your family pays more IHT.
Additionally, your ability to pass on wealth while you’re alive and reduce the size of your estate may also be diminished due to frozen thresholds.
The IHT “gifting annual allowance” – the total value of IHT-free gifts you can make each year – has been set at £3,000 since April 1981. Had it increased with inflation in this time, you would now be able to make £11,529 worth of tax-efficient gifts each year.
As a result, it’s more important than ever to consider your estate plan and how much your family could pay in IHT when you’re gone.
Careful financial planning could help you mitigate the effects of stealth taxes
If left unchecked, stealth taxes could make a significant difference to your financial plan.
Fiscal drag might erode your take-home pay, meaning you find it more difficult to save and invest for the future. Meanwhile, frozen IHT thresholds might mean your beneficiaries lose a large portion of their inheritance to tax.
Fortunately, with the right forward planning and professional support, you could mitigate the effects of stealth taxes.
For example, while you’re working, we might discuss options for increasing your pension contributions. This could reduce your taxable income and potentially even bring you into a lower Income Tax bracket.
You will also typically receive tax relief from the government on your contributions.
If you’re retired, we can also discuss the most tax-efficient ways to draw an income from your pensions, investments, and savings. Consequently, we can limit the taxable income you take each year and potentially mitigate a large bill.
As you look ahead and think about the legacy you will leave for your loved ones, we can explore IHT-planning options with you to ensure you can pass on as much wealth as possible.
Get in touch
If you’re concerned about stealth taxes and want to find ways to protect your wealth, we can help.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.