3 “stealth taxes” that could affect you as important thresholds remain frozen

The earliest evidence of taxation dates to ancient Egypt around 3000 BCE. Since then, most civilisations have relied on taxes of some kind to fund infrastructure and provide public services.

As time goes by, these tax systems become more complex and in the UK, there are currently more than 20 different taxes that might affect you personally.

As such, it’s important that you consider your tax liability and pay close attention to any increases that might affect your financial plan, so you can find ways to mitigate a large bill.

Unfortunately, this could be difficult because tax rises are not always direct. While the government might raise more revenue by increasing the rate of certain taxes, this is not the only way they can boost the amount you pay.

Often, you could be caught out by “stealth taxes” – indirect tax rises caused by freezing or reducing thresholds, exemptions, and allowances. In some cases, important allowances have been unchanged since the 1980s.

Read on to learn about three stealth taxes you may need to be aware of.

1. Frozen Income Tax thresholds

If you’re employed, you likely pay Income Tax on your earnings. In the 2025/26 tax year, you can earn up to £12,570 before you pay any Income Tax. This is your “Personal Allowance”.

You will then pay:

The basic rate of 20% on earnings between £12,571 and £50,270
The higher rate of 40% on earnings between £50,271 to £125,140
The additional rate of 45% on earnings that exceed £125,140.

The percentage rates of Income Tax have not changed for many years. Despite this, you are likely paying more Income Tax than you have in the past because of frozen tax thresholds.

The Personal Allowance hasn’t increased since April 2021, and the chancellor confirmed it would remain at its current level until at least April 2028.

Additionally, the basic- and higher-rate tax thresholds haven’t risen since April 2021, and the additional-rate threshold reduced in April 2023.

Meanwhile, in this time, your earnings might have increased. Indeed, according to Statista, the average UK wage increased from £33,061 in 2022 to £37,430 in 2024.

This could mean that a higher portion of your earnings exceed the Personal Allowance, and you might be more likely to move into a higher tax bracket.

Consequently, your Income Tax bill may have increased over time, even though the rates remain the same.

2. The “60% tax trap”

The “60% tax trap” is another stealth tax to be aware of if you earn at least £100,000.

Once your earnings reach this level, your Personal Allowance reduces by £1 for every £2 you exceed the threshold. If you earn £125,140 or more, you won’t have any Personal Allowance at all.

As a result of this tax rule, you could pay an effective 60% tax rate on earnings between £100,000 and £125,140.

For example, imagine you earn £100,000 and receive a £1,000 pay increase. You would pay 40% tax on the extra £1,000, giving you a bill of £400. However, you also lose £500 of your Personal Allowance.

You would then pay 40% Income Tax on that £500 – another £200. As a result, you pay a total of £600 tax on the £1,000, giving you an effective tax rate of 60%.

This is despite the fact that your marginal rate of Income Tax is “officially” 40%.

3. Static Inheritance Tax allowances and changes to the tax treatment of pensions

Depending on the value of your estate, your family might pay Inheritance Tax (IHT) on a portion of your wealth when you pass away.

The rate of IHT has been 40% since the levy replaced Capital Transfer Tax in 1986. However, many important thresholds are frozen, meaning the amount of IHT your family will likely pay could increase.

For instance, the “nil-rate band” – the amount you can pass on without triggering an IHT charge – has been frozen at the current level of £325,000 since April 2009 and will remain so until April 2030.

The “residence nil-rate band” – an additional allowance you may benefit from when passing your main home to a direct descendant such as a child or grandchild – has been set at £175,000 since April 2020.

As house prices increase and you potentially build your savings and investments, the overall value of your estate could rise significantly. Due to static nil-rate bands, this means more of your estate could be pushed into the taxable range.

Further to this, the “gifting annual exemption” – the amount of immediately IHT-free gifts you can give each year – has been set at £3,000 since 1981. This means it could be more difficult than ever to pass wealth to your loved ones tax-efficiently.

Finally, you may have heard recent news about the tax treatment of pensions. Currently, pensions are exempt from IHT, but the chancellor announced plans to remove this exemption from April 2027 onwards.

This means that your family may pay IHT on any remaining wealth in your pensions after you’re gone.

The combination of frozen nil-rate bands and gifting allowances, and upcoming changes to the tax treatment of pensions, could significantly increase the IHT liability of your estate.

Get in touch

If you are concerned about how stealth taxes might affect your financial plan, we can support you.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.