18 September 2025
general
Looking at tax rates alone, you could be forgiven for thinking that taxes have remained stable over the past few years. Indeed, many tax rates have remained unchanged for several years, including:
However, while the percentages have stayed the same, the thresholds at which these rates apply have been frozen.
Typically, the thresholds would rise with inflation to ensure the same percentage of your wealth is captured in each tax band. However, despite Office for National Statistics (ONS) data showing inflation has consistently remained above the Bank of England’s (BoE) 2% target since May 2021, many tax thresholds have remained frozen for several years.
Known as “stealth taxation”, freezing tax thresholds usually results in “fiscal drag”. In effect, by fixing the level at which tax is due, these freezes erode the value of tax-free allowances and push more people into higher tax thresholds as wages rise.
As a result, your tax bill is likely to have risen significantly over the years.
Plus, with the government seeking to generate more tax revenue in the coming years, it seems unlikely these thresholds will be thawed any time soon.
Read on to discover five tax thresholds that are currently frozen, what this could mean for your finances, and the steps you can take to improve your tax efficiency.
1. The Income Tax Personal Allowance is set to remain frozen until at least 2028
First frozen in 2021, and later extended in 2022, the Income Tax Personal Allowance is currently expected to remain at £12,570 until April 2028.
However, with the government’s 2025 Autumn Budget set to be delivered on 26 November 2025, there is a growing concern that the freeze could be extended once again – this time until 2030.
For taxpayers, this freeze is proving costly. According to AJ Bell, if the Personal Allowance had continued rising with inflation, in 2025/26 it would sit at £15,550. In this scenario, basic-rate (and most higher-rate) taxpayers would now be able to earn an additional £2,980 tax-free.
And it’s not just workers who could be affected. Thanks to the triple lock, the new State Pension rises annually by a minimum of 2.5%. As a result, MoneyWeek forecasts that those receiving the full new State Pension as their sole source of income could be paying Income Tax on it by 2027 – or earlier, depending on inflation and average earnings growth.
Meanwhile, around 420,000 retirees will incur Income Tax in the 2025/26 tax year.
2. Higher- and additional-rate Income Tax thresholds are also frozen until 2028
Along with the Personal Allowance, the thresholds for becoming a higher- or additional-rate taxpayer are also fixed until April 2028 at:
Consequently, according to MoneyWeek, some high earners could be paying £2,445 more in Income Tax by April 2028.
And, BBC News reports that 2.6 million more taxpayers could be paying the higher rate of Income Tax by 2027/28.
3. The Personal Allowance taper hasn’t increased since 2010
The Personal Allowance taper was first fixed at £100,000 in 2010. Since then, it has remained unchanged.
Also known as the “60% tax trap”, the taper effectively diminishes your Personal Allowance as your income rises after a certain point.
In effect, this can mean you pay 60% tax on any income between £100,000 and £125,140.
In some cases, it may be tax-efficient to reduce your income through salary sacrifice schemes, such as Payroll Giving or pension contributions. Because these deductions are often made before Income Tax is calculated, they could help keep you below the £100,000 threshold to avoid losing out on your Personal Allowance.
A financial adviser can help you create a tax-efficient plan to maximise your earnings.
4. The Personal Savings Allowance has remained unchanged since 2016
The Personal Savings Allowance (PSA) was put in place in 2016 to allow savers to earn interest tax-free.
As of 2025/26, your PSA depends on your tax bracket:
Not only is inflation eroding the real-terms value of tax-free savings, but as more people are pushed into a higher tax bracket by salary increases and frozen Income Tax thresholds, many taxpayers could also incur further tax on their savings. In some cases, savers could see their PSA halved – or completely eliminated.
However, you may be able to maximise your tax-efficient interest by saving into an ISA. As of the 2025/26 tax year, adult ISAs generally have a tax-efficient allowance of £20,000, while you may be able to pay up to £4,000 a year into a Lifetime ISA (LISA) tax-free.
By consulting with a financial adviser, you can determine tax-efficient ways to grow your savings, depending on your personal needs and circumstances.
5. Some Inheritance Tax thresholds haven’t changed in over 40 years
IHT receipts have been increasing year-on-year, with HMRC reporting it received £200 million more in IHT between April and July 2025 than in the same period in 2024. Frozen tax thresholds could be a significant contributing factor.
The annual exemption, an IHT-free gifting allowance, has remained unchanged at £3,000 since it was introduced in 1981 – significantly eroding the value of tax-free gifting in real terms. According to MoneyWeek, if the threshold had kept pace with inflation, today you would be able to give gifts of up to £11,529 a year without incurring tax.
What’s more, the nil-rate band (otherwise known as the tax-free IHT threshold) has also remained frozen at £325,000 since 2009, while the residence nil-rate band has been fixed at £175,000 since 2020. Had these values risen with inflation, today they would amount to a combined tax-free allowance of up to £740,000, rather than the existing £500,000.
As wages rise, as well as the cost of property and other assets typically included in estates, more people are seeing their estates tipped over the nil-rate band to incur an IHT bill.
The rules around IHT can be complex. However, with careful planning and the support of a financial adviser, you may be able to reduce your estate’s IHT bill and pass on more wealth to your beneficiaries.
Get in touch
While many tax thresholds remain frozen, with careful financial planning you may be able to reduce your bill. Email enquiries@jesellars.co.uk or call 01934 875919 to find out more about how we can help you.
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.
