The Stealth Tax Squeeze

A new report has highlighted the growing impact of frozen tax allowances in the UK, with some thresholds remaining unchanged for more than four decades.  

Research from Association of Taxation Technicians (ATT) found that numerous allowances have remained static for decades, resulting in taxpayers paying more in real terms without any formal increase in tax rates – a policy by the Government known more informally as ‘stealth tax’.  

ATT argues that many tax reliefs are overdue a comprehensive review, as years of inflation have steadily reduced their real-world value through fiscal drag.

So, who’s being affected by ‘stealth taxes’?

Almost everyone will in some way or another be losing money to stealth taxes.  

Inheritance tax provides some of the clearest examples. The nil-rate band, which determines how much of an estate can be passed on free from inheritance tax, currently remains at £325,000 per individual. This threshold was last increased 17 years ago and is now scheduled to stay frozen until 2031. According to the ATT report, if it had been adjusted in line with inflation, it would stand at approximately £525,000 today, around 60 per cent higher than its current level.

The same pattern can be seen across other inheritance tax exemptions. The annual gifting allowance has been fixed at £3,000 since 1981. Using the Bank of England’s inflation calculator, the ATT estimates that an inflation-linked equivalent would now be around £11,800, almost four times the existing allowance.

Meanwhile, the wedding gift exemption has remained unchanged at £5,000 since 1975, having originally been introduced under the capital transfer tax regime before inheritance tax existed in its current form. Had it increased in line with inflation over that period, it would now be worth £39,876, representing a rise of 697 per cent. With UK weddings in 2026 costing on average an eye watering £20,604, that missed 697 per cent will come with an especially nasty sting for newly weds.  

The report also found that savers have been affected by the same phenomenon. Basic-rate taxpayers can currently receive up to £1,000 of savings interest tax-free under the personal savings allowance, while higher-rate taxpayers are entitled to £500. Had these limits risen alongside inflation since their introduction in 2016, they would now be worth roughly £1,400 and £700 respectively.

Homeowners benefiting from the Rent a Room scheme have also seen the value of their tax break eroded. The scheme's £7,500 tax-free income limit has not increased since 2016. If it had kept pace with inflation, it would now be closer to £10,500.

Not even those saving into their pensions have been able to escape the stealth tax net. Individuals without relevant earnings can contribute £2,880 each year to a pension, which becomes £3,600 after tax relief is added. This allowance has remained unchanged since 2000. If uprated for inflation, it would be approximately £5,500 net, or £6,850 including tax relief.

The forever frozen allowances

It has become the new norm for each Government to announce a further freeze on allowances, kicking the can down the road with each successive freeze, all the while taxpayers are being forced to hand over increasing amounts as fiscal drag pulls them ever further beyond the outdated thresholds.  

One example of this is inheritance tax (IHT). Total IHT receipts collected by the Government has been steadily on the rise since the IHT threshold freeze.  

This was initially announced by the then Chancellor, Rishi Sunak, in his 2021 Budget. The Budget outlined that the IHT threshold would be frozen for five years until 2026. However, after ex-Chancellor Jeremy Hunt’s 2023 Autumn Statement, it was confirmed that the freeze would be extended a further two years until April 2028, and then after Rachel Reeves’ 2024 Autumn Statement, this was extended once again a further two years until April 2030, and finally after her 2025 Autumn budget, it was again extended, this time until April 2031.  

Many have been calling this a clear example of stealth taxes, as the freeze ultimately means an increasing number of Britons will fall into the tax threshold each year until the freeze ends in April 2031 – if it indeed does end and hasn’t been extended again by that time – and by then the Government will have collected billions of pounds worth of extra IHT from the taxpayer. 

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

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

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.