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This article is for general guidance only and is not financial or professional advice. It contains promotional content and links to financial products. All figures and information in this article are correct at the time of publishing. Laws, entitlements, tax treatments and allowances may change in the future. Before you make any decisions, you should get independent professional advice.
April usually promises a fresh financial start, but this new tax year comes with a sting in the tail. Despite no headline rises in income tax rates, frozen allowances and thresholds mean more of your income is quietly being pulled into the tax net, and in some cases taxed at higher rates than before.
The freeze on income tax thresholds is celebrating its fifth birthday – and it still has five years to run. Meanwhile inheritance tax thresholds have been frozen for even longer.
Here’s how much the continued tax freeze is costing you, and what you can do to soften the blow.
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'Fiscal drag’ might sound like dry economic jargon, but its reality is painful. As wages and pensions rise with inflation, frozen tax thresholds quietly drag you into paying tax on more of your income, and in some cases higher rates of tax too.
Charlene Young, senior pensions and savings expert at AJ Bell, explains the scale of the issue: “The taxman will be getting out the bunting to celebrate the 5th birthday of the tax raid on workers, pensioners, savers and investors. On 6 April it will be five long years since income tax thresholds were frozen at 2021 levels by then chancellor Rishi Sunak.
“Since then the personal allowance of £12,570 and the higher rate threshold of £50,270 have been stuck in time with Rishi Sunak, his successor Jeremy Hunt and now Rachel Reeves conspiring to fix tax thresholds at April 2021 levels ever since. By the time thresholds rise in April 2031 the income tax system will have been in deepfreeze for a decade.”
She adds: “The marathon squeeze on household finances should’ve been coming to an end in April this year. When former chancellor Rishi Sunak first unveiled operation stealth tax it was supposed to be a five-year sting ending with tax thresholds going up in April 2026.
“But… taxpayers have seen the finishing line on the tax freeze marathon extended to 2031.”
A basic rate taxpayer earning £35,000 will pay an estimated £4,500 income tax bill this year. Had the personal allowance tracked inflation since 2021, that bill would have been nearly £1,000 lower.
For higher earners on £75,000, the freeze will cost around £4,800 extra in tax.
The freeze on the £12,570 personal allowance is UK-wide, so affects Scottish taxpayers too. Other income tax thresholds are devolved in Scotland, and those have not been frozen in the same way.
Wherever you live in the UK, Olly Cheng, financial planning divisional lead at Rathbones, points out the urgency of acting now: “Add in higher council tax, water bills and telecoms costs, and it becomes a series of smaller hits adding up. The danger is people don’t feel the squeeze until the year is already under way, which is why it’s so important to take stock before and after the new tax year to get finances in the best possible shape.”
The state pension has risen by 4.8% under the triple lock, which is a welcome boost. The full new state pension is now around £12,548 a year. But this pushes it perilously close to the frozen £12,570 personal allowance.
Rachel Vahey, head of public policy at AJ Bell, says: “Under the triple lock guarantee, the state pension rises annually by the highest of average earnings growth in May to July, September’s inflation figure or 2.5%. With earnings growth coming in at 4.8%, the state pension will increase to around £12,548 – putting it above £12,000 for the first time and within inches of the frozen personal allowance.”
The government has promised that from 2027, pensioners whose only income is the state pension won't pay tax. But Vahey warns this comes with complications.
“It is still unclear exactly how the policy will be implemented and it’s hard to see how such a measure can last long-term. State pension incomes will continue to grow faster than the frozen personal allowance until at least 2031, by which time the tax break could be worth hundreds. But it will only apply to those with the state pension as their sole source of income and there are no plans to extend it to low-income pensioners with private pension income. It means two pensioners on identical incomes could find only the one with private savings has to pay any tax.”
If you or your family members are higher earners, beware the £100,000 tax trap. Once your taxable income goes above £100,000, your personal allowance is tapered away, creating an effective marginal tax rate of 60% (or 62% when you factor in national insurance).
Rathbones estimates a record 2.06 million people will earn over £100,000 this year. Olly Cheng says: “A new tax year is meant to be a clean slate, but for many higher earners it marks the point at which pay rises and bonuses turn into a tax shock. Frozen thresholds mean more people are starting this tax year already exposed to punitive marginal rates.”
The nil-rate band for inheritance tax remains frozen at £325,000, where it has been since 2009 (although the nil rate residence band has been added since then, but has been frozen since 2020). Combined with rising property values, thousands more families are being caught out. Rathbones data suggests over 3,500 estates could face inheritance tax bills of £500,000 or more this year.
Cheng warns: “Each new tax year quietly brings more families into the inheritance tax net. With thresholds frozen and asset values rising, IHT is no longer just a concern for the ultra-wealthy. The issue is set to intensify from April 2027, when pension assets are brought into scope – a change that could pull even relatively modest estates into the IHT net. This makes it increasingly important for families to engage in effective financial planning.”
With taxes rising stealthily and household bills rising this month, you should consider taking action. These steps could help to protect your wealth:
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