A decade of stealth tax: what it means for your wealth

In the Autumn 2025 Budget, Chancellor Rachel Reeves confirmed that the freeze on income tax thresholds and allowances will now continue until at least 2031. What was announcement in 2021 as a short-term measure to stabilise public finances post-COVID, will become a 10-year freeze, one of the most significant, and often unnoticed, tax policies in a generation.

This long-term freeze is what’s known as a “stealth tax” or “fiscal drag”. Instead of raising the rates you pay, the government simply keeps tax bands and allowances frozen. And as your income, pension, or savings grow with inflation, you end up paying more tax without any changes to the rules themselves. Worse still, while your income may rise with inflation, savings often don’t always keep pace, so the real value of your cash will likely be falling, making a bad situation worse.

It’s a quiet but powerful way of increasing the tax take, and it's starting to catch out more and more people, especially those who are retired or trying to grow their wealth. Although it’s reasonable to expect to pay a fair amount of tax, stealth taxes could be pushing some people over that tipping point.  

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More pensioners paying higher tax

Over the past few years, there’s been a sharp rise in the number of retirees now paying income tax, especially at higher rates.

Back in 2021, around 494,000 pensioners paid tax at the 40% or 45% rates. Fast forward to today, and that number has more than doubled to over 1.2 million, according to figures from HMRC.

And it’s not just those in the top brackets. The total number of pensioners paying any income tax has jumped from 6.7 million to over 9 million in just four years. This isn’t because tax rates have changed, it’s because pensions have gone up while tax-free allowance has stayed the same.

From April 2026, the full state pension will rise to £12,547.60, just shy of the personal tax-free allowance of £12,570. Add even a modest private or workplace pension on top, and many retirees now find themselves paying tax, often for the first time.

Why it matters for savers and investors

Being pushed into a higher tax bracket doesn’t just mean you pay more on your income, it can also reduce or remove other valuable tax allowances. For example:

• The personal savings allowance drops from £1,000 to £500 if you’re a higher-rate taxpayer, and to £0 if you’re in the top band.
• Dividend allowance has shrunk dramatically, now just £500, down from £2,000 in 2022.
• Capital Gains Tax exemption has fallen over the years to £3,000 for individuals and £1,500 for trusts

And in the 2025 Budget, the Chancellor also announced higher tax rates on savings income from April 2027, a rise to 22% for basic-rate taxpayers and 42% for higher-rate taxpayers with additional rate paying 47%.

Added to this, from April 2026, the dividend tax rates themselves are set to rise:

• For basic-rate taxpayers, the rate will increase from 8.75% to 10%
• For higher-rate taxpayers, from 33.75% to 35%
• And for additional-rate taxpayers, from 39.35% to 39.6%

These changes mean investors could face higher tax bills even on modest dividend income, especially as the tax-free allowance continues to shrink. 

The 60% tax trap

If you earn between £100,000 and £125,140, the tax system becomes especially punishing. In this band, your personal allowance is gradually taken away, so for every £2 you earn over £100,000, you lose £1 of your personal allowance.

This creates an effective tax rate of 60%, and once you factor in National Insurance, that jumps to 62% for many.

This hidden trap hasn’t been adjusted since 2010 and rising wages have brought many professionals into its grip. If you're approaching this income range or in it, planning is key as there are solutions to minimise or even mitigate against it.

Inheritance Tax: catching more estates

Inheritance Tax (IHT) is another area where frozen thresholds are bringing in more families each year.

The main threshold of £325,000 hasn’t changed since 2009, despite rising property prices. With the Residence Nil Rate Band (£175,000), for those passing down their main residence to direct descendants, a couple can pass on up to £1 million tax-free. However, this will depend on the value of the property and the overall value of the estate, larger estates may see a reduction or loss of the Residence Nil Rate Band. If the total estate is worth more than £2 million, the Residence Nil Rate Band is reduced by £1 for every £2 over the £2 million threshold. Anything above the available thresholds may face a 40% inheritance tax bill.

In 2024/25, IHT receipts hit a record £8.2 billion. With no reforms announced in the 2025 Budget and the freeze extended to at least 2031, this number is only expected to rise.

What can you do to mitigate stealth taxes?

While you can’t control tax thresholds or government policy, you can take action to protect your income and your legacy.

Here are a few of the strategies that could help:

• Use ISAs to shelter savings and investments from tax
• Structure pension withdrawals carefully to avoid unnecessary tax
• Make use of salary sacrifice where possible to reduce income and NI
• Gift assets tax-efficiently as part of longer-term estate planning
• Review your total income regularly to avoid tipping into higher brackets

These are just a few possible strategies, but a personalised, bigger financial plan should ensure your wealth is working for you and your family.

The bottom line

A decade of frozen allowances will reshape the tax landscape. For many, it’s no longer enough just to “stay under the limit”, the limits themselves are working against you.

That’s where strategic, personalised financial planning comes in. By looking at your whole financial picture, we can help you protect your wealth and plan with confidence for the future.
Get in touch with one of our financial advisers to see how we can help you navigate the years ahead with a plan that works for you. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Investment returns are not guaranteed, and you may get back less than you originally invested. Past performance is not a guide to future returns.