The growing burden of Stealth Taxes on Pensioners and Investors

Over the past few years, millions of people across the UK have found themselves quietly paying more tax, even if they haven’t seen a single change to their tax rate. This subtle yet powerful shift in the nation’s tax landscape has not been driven by headline-grabbing announcements, but rather by what are commonly referred to as “stealth taxes.” These measures raise government revenue not through overt rate increases, but via frozen thresholds and shrinking allowances, often going unnoticed until the financial pinch begins.

Arrange your free initial consultation

A surge in pensioners paying higher tax

New figures obtained from HM Revenue and Customs under the Freedom of Information Act reveal just how widespread this issue has become. According to Steve Webb, former Pensions Minister, the number of pensioners now paying income tax at the higher (40%) or additional (45%) rates has more than doubled in just four years. In 2021/22, around 494,000 pensioners were affected; today, that number has surpassed one million.
Even more revealing is the total number of pensioners paying income tax at any level. This has risen from 6.7 million to 8.8 million over the same period, an increase of nearly a third. This is not due to tax rate hikes, but instead to frozen thresholds and rising pension income pushing more retirees into tax-paying brackets.

How fiscal drag is quietly hitting retirees

At the heart of this trend is a phenomenon known as “fiscal drag.” This occurs when tax thresholds remain static while incomes, particularly pensions, increase with inflation. The personal allowance and higher-rate threshold have both been frozen since 2021 and are expected to remain frozen until 2028. During this time, state and private pensions have risen, mainly due to inflation and the government's commitment to the triple lock.
From April 2025, the full new state pension rose to £11,973, just below the £12,570 personal allowance. This means that for anyone with a modest workplace or private pension on top of their state entitlement, paying income tax has become the norm rather than the exception.

More than just Income Tax

Crossing into higher-rate tax bands doesn’t just mean paying more on income, it also has knock-on effects for other allowances. For instance:
•    The Personal Savings Allowance is halved from £1,000 to £500 for higher-rate taxpayers.
•    The Dividend Allowance has been reduced in recent years, currently sitting at just £500 (down from £2,000 in 2022).
•    The Capital Gains Tax exemption was halved to £3,000 from April 2024, falling from a high of £12,300 in 2022/23 tax year.
For those crossing into the additional rate tax band (which was lowered from £150,000 to £125,140 in 2023/24) these allowances are cut even more sharply. In the case of savings interest, the Personal Savings Allowance is removed entirely.

Rising Tax bills for savers and investors

Stealth taxation is not just affecting pensioners. The Personal Savings Allowance has remained unchanged since it was introduced in 2016. For years, with ultra-low interest rates, this wasn't a major issue. But the tide has turned.
With the Bank of England increasing interest rates to tackle inflation, savings accounts are now generating more interest and more tax. In the 2022/23 tax year, 1.77 million people paid tax on their savings interest, up from just 970,000 the year before. HMRC reports that the amount raised from this alone more than doubled from £1.2 billion to £3.4 billion.
In the 2023/24 tax year, an estimated 1.9 million people paid tax on their savings interest, up from 1.77 million the year before and just 970,000 in 2021/22. According to HMRC the amount raised from tax on savings interest surged to a record £9.1 billion, more than double the £3.4 billion collected in 2022/23, and over seven times the £1.2 billion from 2021/22. Projections for 2024/25 suggest that over 2 million savers will pay tax on interest, with HMRC expecting to collect £10.4 billion.

A Growing Inheritance Tax catch

Another stealth tax that continues to ensnare more households is Inheritance Tax (IHT). The nil-rate band for IHT has been frozen at £325,000 since 2009. Over this time, property and asset values have risen dramatically. As a result, more estates now breach the threshold and face IHT liabilities. Although, in 2017 the Residence Nil Rate Band was introduced which permitted individuals, passing down their main residence to direct descendants, an additional allowance of up to £175,000. Meaning, for married couples /civil partnerships up to £1million could be passed down free of IHT. However, those estates of over £2million would be subject to tapering. You can read more about this here.

In 2024/25, IHT receipts hit a record £8.2 billion. With the freeze extended until at least 2030 and no indication of major reform, families are increasingly vulnerable to unexpected tax bills, even those with relatively modest estates.

What can be done? The case for proactive planning

While stealth taxes are largely outside of our control, their impact doesn’t have to be. With careful planning, it’s possible to reduce unnecessary tax exposure and protect long-term wealth. Strategies may include:

• Making full use of ISAs for tax-free savings and investments
• Structuring pension drawdowns to minimise tax liabilities
• Gifting assets in a tax-efficient manner to reduce IHT exposure
• Reviewing income regularly to avoid crossing thresholds unnecessarily
• Increasing pension contributions to lower taxable income through salary sacrifice.

Each individual’s situation is different, and the tax system is becoming increasingly complex. For many, professional advice can help clarify their position and create a clear, forward-looking financial strategy.

60% tax trap

For those earning between £100,000 and £125,140, the tax system becomes especially punitive. In this income band, individuals lose £1 of their tax-free personal allowance for every £2 earned above £100,000, effectively creating a 60% marginal tax rate. This stealthy threshold has increasingly drawn in middle- and upper-middle earners, particularly as it hasn’t been adjusted for inflation since 2010. Despite rising wages and fiscal drag, the government has so far resisted reform, leaving many professionals facing disproportionately high tax bills.

Staying ahead in a shifting tax landscape

As the government continues to rely on threshold freezes to raise revenue without increasing tax rates, more households, particularly pensioners, will feel the squeeze. These are not sudden shocks, but slow, creeping changes that can significantly erode financial wellbeing over time.

Understanding the full picture and taking early, informed action is key. Whether you are drawing a pension, managing savings, or planning your estate, speaking with a qualified financial adviser can help you navigate the challenges ahead and ensure your finances remain aligned with your goals.

If you’re concerned about an increasing tax burden on your wealth why not get in touch and speak to one of our financial advisers to see how we can help.

Arrange your free initial consultation

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 estate planning or tax advice.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.