Frozen Tax Thresholds: The “Stealth Tax” you might not have noticed

Introduction

When people think about tax increases, they usually look at the obvious things, such as changes in tax rates or new rules being introduced.

In reality, a lot of the increase in tax over recent years has come from something much quieter: frozen tax thresholds.

More and more people are finding they are paying higher tax without any obvious change in their circumstances.

What’s actually happening?

A number of key thresholds have remained at the same level for several years now. This includes the personal allowance and higher rate threshold, alongside reductions in dividend and savings allowances.

At the same time, income, whether from employment, investments or business interests, has generally been increasing.

The result is fairly simple. More income ends up being taxed at higher rates.

It does not feel like a tax rise in the traditional sense, but the end result is often the same.

Why this is catching people out

This is no longer something that only affects higher earners.

We are increasingly seeing:

• Basic rate taxpayers being pushed into higher rate tax
• Savings income becoming taxable where it was not before
• Dividend income creating liabilities much sooner than expected

There can also be knock-on effects. As income increases, certain allowances or reliefs may start to reduce or fall away altogether.

The slow creep

What makes this tricky is how gradual it is.

There is usually no single moment where things change dramatically. Instead, it is a slow shift over a number of years. A position that once felt relatively tax-efficient can become less so without anything obvious changing on the surface.

That is often where people get caught out. Not because they have done anything wrong, but because the rules around them have effectively tightened.

Where planning comes in

While the thresholds themselves are not something that can be changed, there is usually some flexibility in how income and assets are structured.

In many cases, relatively small adjustments can make a difference, but these tend to depend on individual circumstances. What works in one situation may not be right in another.

Because of that, opportunities are often missed unless there is a conscious review.

Next steps

Frozen thresholds might not get the same attention as headline tax changes, but over time they can have a real impact.

As more income is pulled into higher tax bands, it becomes increasingly important to understand how your position is evolving.

If you would like to sense-check your current position, please get in touch.