One of the most effective stealth taxes in recent years has been the freezing of personal tax thresholds.
By holding income tax bands and allowances at their current levels, while wages and prices rise, more people are gradually pulled into paying more tax and higher earners are nudged into the higher and additional rate brackets due to fiscal drag.
At present, the freeze is due to last until 2027/28, but speculation suggests the Chancellor could extend this to the end of the economic cycle, potentially to 2030.
On paper, this is not an increase in tax rates, but the effect on taxpayers’ bills would be very real.
The hidden tax rise
Freezing thresholds creates what economists call fiscal drag. For example:
- Workers receiving pay rises to keep pace with inflation can suddenly cross into the 40 per cent or even 45 per cent bands.
- Individuals who previously paid no Income Tax at all may find themselves brought into the system for the first time as their wages exceed the frozen Personal Allowance.
The Treasury benefits because it collects more tax without altering headline rates. For many taxpayers, though, the result is higher liabilities despite no increase in their standard of living, this is especially noticed amongst retired people who may have to complete personal tax returns and pay more tax with freezes to rates but inflationary increases in pensions.
Impact on Inheritance Tax
The same principle applies to Inheritance Tax (IHT). The nil rate band (£325,000) and the residence nil rate band (£175,000) have been frozen for years.
As property values continue to rise, more estates fall into scope, driving up IHT receipts even without a policy change.
The tax impact of a longer freeze
Extending the freezes to 2030 would:
- Pull millions more into the tax system for the first time.
- Push many basic-rate taxpayers into higher-rate bands.
- Increase IHT liabilities for families whose estates breach frozen thresholds due to rising property values.
- Deliver billions in extra tax revenue to HMRC without the political headline of “raising taxes.”
Why is a further tax freeze likely?
Unlike cutting allowances or scrapping reliefs, extending a freeze is politically easier to justify. It sounds less like a tax rise and more like a measure of “fiscal responsibility,” but for taxpayers it has the same effect. Paying more, year on year, without rates changing at all.
If the Chancellor opts to extend tax threshold freezes into the next decade, it will lock in years of stealth tax rises.
Income Tax and Inheritance Tax would steadily climb as a share of household finances, affecting more people at lower levels of income and wealth.
As a result, it would be necessary to review all your tax plans to ensure that you make the most of current reliefs and allowances to minimise your liabilities.