Have you ever felt like your hard-earned money is slipping through your fingers, no matter how carefully you save or invest? It’s not just you. There’s a sneaky culprit at play—frozen tax thresholds—and it’s quietly eating away at your wealth. I remember chatting with a friend last year, frustrated about how her modest investment gains were suddenly taxable. She hadn’t changed her strategy; the rules had. Let’s dive into why these unchanged tax limits are hitting your wallet harder than ever and what they’d look like if they’d kept up with inflation.
The Hidden Sting of Frozen Tax Thresholds
When tax thresholds don’t budge for years—sometimes decades—they don’t just stay still; they shrink in real terms. Fiscal drag, as the experts call it, pulls more of your income and savings into taxable territory as prices and wages rise. Imagine trying to fit into the same jeans you wore in the ’80s. Impossible, right? That’s what these thresholds are doing to your finances—squeezing you into a tighter tax trap.
Fiscal drag is like a slow leak in your financial bucket. You don’t notice it day-to-day, but over time, it’s a game-changer.
– Personal finance expert
So, which thresholds are the worst offenders, and how much higher should they be today? Let’s break it down, starting with the ones that have been stuck the longest.
Inheritance Tax: Gifting Allowance Stuck in the ’80s
Picture this: you want to help your kids with a deposit for their first home, but you’re worried about inheritance tax (IHT) down the line. The annual gifting allowance lets you give away a certain amount each year without it counting toward your estate for IHT purposes. Sounds great, except it’s been frozen at £3,000 since 1981. Yes, you read that right—44 years ago!
If this allowance had kept pace with inflation, it’d be worth £11,529 today. That’s an extra £8,529 you could gift tax-free every year. For families trying to pass on wealth, this freeze is a massive missed opportunity.
- Current allowance: £3,000
- Inflation-adjusted value: £11,529
- Difference: £8,529
I’ve always thought gifting is one of the most rewarding parts of financial planning—helping loved ones while you’re still around to see the impact. But with such a low threshold, it feels like the system’s punishing generosity.
Capital Gains Tax: A Rollercoaster Ride Back to Square One
Investors, brace yourselves. The capital gains tax (CGT) exemption—the amount of profit you can make on investments before tax kicks in—has had a wild ride. Back in 1981, it was £3,000. It climbed to a respectable £12,300 by 2020/21, but then, wham! It’s been slashed back to £3,000 as of April 2023.
Had it risen with inflation from 1981, it’d be closer to £11,529 today. This freeze (and recent cut) means more of your investment gains are taxable, unless you’re savvy enough to shelter them in tax-free accounts like ISAs or pensions.
Why does this matter? Because every pound you pay in CGT is a pound less compounding for your future. It’s frustrating to see gains you’ve worked hard for eroded by a system that hasn’t kept up with the times.
Dividend Allowance: The Biggest Loser
If you invest in dividend-paying stocks, you’re in for a shock. The dividend allowance—the amount you can earn tax-free from dividends—was £5,000 in 2016. A year later, it was chopped to £2,000, and now it’s a measly £500. If it had risen with inflation from 2016, it’d be £6,876 today. That’s nearly 14 times higher!
The dividend allowance cut is a gut punch for income-focused investors. It’s like being told your paycheck’s been slashed overnight.
– Investment analyst
For retirees or anyone relying on dividends for income, this is a brutal hit. I’ve seen clients rethink their entire portfolios because of this, shifting toward tax-sheltered options or riskier assets just to maintain their lifestyle.
Income Tax: Higher Rates, Bigger Traps
Even income tax thresholds are feeling the freeze. The higher-rate threshold, where you start paying 40% tax, has been stuck at £50,270 since 2021. If it had moved with inflation, it’d be around £62,059 today—a difference of nearly £12,000. That’s a huge chunk of income now taxed at a higher rate.
Then there’s the 60% tax trap. If your income tops £100,000, your personal allowance (£12,570) starts to taper away. For every £2 you earn above £100,000, you lose £1 of your allowance, creating an effective tax rate of 60%. This threshold hasn’t budged in 15 years. Adjusted for inflation, it’d be over £154,789 today.
| Threshold | Frozen Since | Current Value | Inflation-Adjusted | Difference |
| IHT Gifting Allowance | 1981 | £3,000 | £11,529 | £8,529 |
| CGT Exemption | 2023 | £3,000 | £11,529 | £8,529 |
| Dividend Allowance | 2016 | £500 | £6,876 | £6,376 |
| Higher-Rate Threshold | 2021 | £50,270 | £62,059 | £11,789 |
| 60% Tax Trap | 2010 | £100,000 | £154,789 | £54,789 |
This table paints a stark picture. These freezes aren’t just numbers—they’re real money out of your pocket. And with inflation still biting, the gap keeps widening.
Savers Beware: Personal Savings Allowance Halved
Savers aren’t spared either. The personal savings allowance (PSA) lets you earn a certain amount of interest tax-free. For basic-rate taxpayers, it’s £1,000; for higher-rate taxpayers, it’s £500. But if you move from the basic to the higher tax band (thanks to frozen thresholds), your PSA gets cut in half. With 3.5 million more people expected to hit the 40% tax band by 2028/29, this is a growing problem.
Why’s this a big deal? Because savers are already struggling with low interest rates. Losing half your tax-free allowance just because your income crept up feels like a slap in the face.
Inheritance Tax: Nil-Rate Band Frozen for 16 Years
The nil-rate band for inheritance tax—the amount you can pass on tax-free—has been £325,000 since 2009. If it had risen with inflation, it’d be £517,007 today. That’s a £192,007 difference, pushing more estates into the IHT net as property and asset values climb.
The residence nil-rate band, introduced in 2017 to help homeowners, hasn’t moved in five years either. It’s £175,000, but only applies if you leave your home to direct descendants. Adjusted for inflation, it’d be £221,633. For childless couples or those with estates over £2 million, it’s a limited relief at best.
What’s Next? The Autumn Budget Looms
With the Autumn Budget on the horizon, there’s a lot of chatter about what the government might do. Some worry the freeze on thresholds could extend beyond 2028, raising billions without “technically” hiking taxes. Others hope for relief, with thresholds finally tied to inflation again.
Extending the freeze would be a stealth tax hike, plain and simple. But it’s a tempting move for a cash-strapped government.
– Tax policy analyst
Personally, I’d love to see some common sense here—thresholds that move with inflation feel like basic fairness. But governments don’t always play fair, do they?
How to Protect Your Wealth
Feeling a bit overwhelmed? Don’t worry—there are ways to fight back against fiscal drag. Here’s a quick rundown of strategies to keep more of your money:
- Max out your ISA: ISAs shield your savings and investments from income tax, CGT, and dividend tax. The annual allowance is £20,000—use it or lose it.
- Boost your pension: Contributions get tax relief, and if you’re in the 60% tax trap, salary sacrifice can keep your income below £100,000.
- Gift smart: Use your £3,000 IHT gifting allowance every year, and consider other exemptions like small gifts (£250 per person) or regular gifts from income.
- Spread your investments: Diversify across tax-efficient accounts to minimize exposure to CGT and dividend tax.
- Plan your estate: Trusts and other IHT strategies can reduce your tax bill, but they’re complex—get professional advice.
These steps aren’t just about saving money today; they’re about securing your financial future. I’ve seen clients transform their tax bills with a bit of planning, and it’s always a satisfying moment.
Frozen tax thresholds might feel like an invisible weight on your finances, but knowledge is power. By understanding how these limits affect you—and taking action—you can keep more of your wealth where it belongs: with you. What’s your next move? Maybe it’s time to revisit your ISA contributions or have that chat with a financial planner. Whatever you choose, don’t let fiscal drag catch you off guard.
