Frozen Tax Thresholds: The Stealth Tax Costing You More

You might not have noticed it, but many people across the UK are quietly paying more tax—even if tax rates haven’t officially gone up. How? Through something called fiscal drag, caused by frozen tax thresholds.

What Are Tax Thresholds?

Tax thresholds are the income levels at which you start paying different rates of tax. For example:

• The Personal Allowance is the amount you can earn before paying any income tax. It’s currently £12,570.
• The Higher Rate Threshold is £50,270—earn above this and you start paying 40% tax instead of 20%.

Normally, these thresholds rise with inflation or wage growth. But right now, they’re frozen until 2028.

Why Does This Matter?

As wages increase—whether due to inflation, promotions, or pay rises—more of your income creeps into higher tax bands. But because the thresholds aren’t moving, you end up paying more tax, even if your standard of living hasn’t improved.

This is what’s known as a stealth tax. It doesn’t make headlines like a rate hike, but it quietly increases the government’s tax take.

Who Is Affected?

Almost everyone who earns a salary or pension is affected:

• Workers getting annual pay rises may find themselves paying more tax, even if their real income hasn’t increased.
• Pensioners with rising private pension income could be pulled into paying tax for the first time.
• Families may lose access to child benefit if one parent’s income crosses the £60,000 mark.

According to HMRC estimates, millions more people will become higher-rate taxpayers by 2028 simply because of these frozen thresholds.

What Can You Do About It?

While you can’t change the thresholds, there are ways to reduce your tax bill:

1. Use Pension Contributions
   Paying into a pension reduces your taxable income. It’s a great way to save for the future and lower your tax today.
2. Claim Gift Aid
   Donations to charity under Gift Aid can also reduce your tax bill, especially if you’re a higher-rate taxpayer.
3. Make Use of ISAs
   Savings and investments in ISAs are tax-free. You can save up to £20,000 a year without paying tax on interest or gains.
4. Check Your Tax Code
   Make sure your tax code is correct. Errors can mean you’re paying too much.
5. Consider Salary Sacrifice Schemes
   These allow you to give up part of your salary in exchange for benefits like childcare vouchers or extra pension contributions—reducing your taxable income.

Final Thoughts

Frozen tax thresholds might sound like a technical issue, but understanding how they work—and taking a few simple steps—can help you keep more of your hard-earned money.

Emer Logue is a Senior Manager at Abac, Chartered Accountants

This article is for general information only. You are recommended to seek professional advice before taking action on the basis of the contents of this article.