Stealth taxes: what to watch out for before the Budget 2025

Stealth taxes are the Government’s favourite magic trick. This is how they take more of your money without ever officially putting your taxes up.

Fuelled by inflation and rising wages, stealth taxes creep up on you – hidden in plain sight, like the pothole on the school run you somehow drive over every single morning that's slowly destroying your alloys.

As we head into the budget, there’s plenty of talk about major policy changes.

But perhaps what really deserves our attention are the quiet adjustments and freezes that can do just as much damage to your wallet.

So, where exactly do these stealth taxes lurk, and how can you spot them in the Chancellor's plans? Let’s take a look.

And for the record, we’re not trying to pick on any party in particular. Many of these thresholds have been frozen for years, under governments of different stripes. Just like dodging questions about rising train fares with campaign slogans, it’s a political habit that transcends party lines – and something needs to be done about it.

Fiscal drag: the slowest mugging in Britain

It might sound like an HM Treasury spin-off of RuPaul’s Drag Race, but fiscal drag is something far less fabulous. It happens when tax thresholds don’t rise with inflation, quietly pulling more of your income into higher tax bands – even if your pay hasn’t actually grown in real terms.

It’s the equivalent of being stuck in the same job while your rent, Netflix subscription, and meal-deal prices all go up.

Since 2021, the personal allowance for income tax – the amount you can earn before HMRC starts rummaging through your payslip – has been stuck at £12,570. The higher-rate band has been fixed at £50,270, and the additional rate was actually lowered in 2023 from £150,000 to £125,140.

If you earn over £100,000, you start to lose your personal allowance altogether – a threshold that hasn't budged since it was first introduced back in 2010.

The long-standing precedent was that thresholds would rise with inflation in a process sometimes called “uprating” or "indexation". And for decades – in fact, since the mid 70s – that's (mostly) exactly what happened. 

But then, the previous Conservative government (followed by the current Labour government) opted to freeze thresholds where they are until at least 2028.  

Winners and losers of fiscal drag

Almost everyone earning above the personal allowance (£12,570) is paying more tax each year without a single headline rate of tax being raised.

Basic- and higher-rate taxpayers were £500 and £1,000 worse off in 2023 alone, and by 2027, someone earning £50,000 in 2022 would be nearly £2,000 a year worse off under frozen thresholds.

To put that into perspective, back in the 90s, when Blockbuster was still a Friday night out and you could get a Freddo for 10p, almost no nurses and just 5-6% of teachers paid higher-rate tax. By 2027-28, it’s expected to be more than one in eight nurses and 25% of teachers.

The chart below shows just how steeply the number of taxpayers in this bracket has been increasing over the past few decades:

Source: Adapted from HMRC statistics, table 2.1, number of individual income taxpayers

And because inflation's been rampant, every frozen band is now miles out of date. Here's what each tax bracket ought to be, if the government had chosen to uprate them:

Tax threshold	Stuck at (2025)	If uprated with inflation
Personal allowance (0% tax)	£12,570	£16,000
Higher-rate 40% threshold	£50,270	£60k
Additional-rate 45% threshold	£125,140	£233k*

Who wins thanks to fiscal drag? Well, HMRC of course.

The Office for Budget Responsibility (OBR) reckons frozen income-tax bands will bring in an extra £38.6 billion a year by 2029–30 – far above the £8 billion forecast when the policy began. 

That’s almost the annual GDP of Iceland, sneakily taken via this stealth tax that makes you poorer without you quite being able to put your finger on why, every single year.

Damien recently took a deep dive into this topic on Damien Talks Money:

Other stealth taxes hiding in plain sight

Freezing income tax bands might be the government’s star turn, but it's far from its only stealthy move.

Recent years have brought a slow procession of stealthy tax changes designed to raise billions without triggering the outrage that comes with an official tax hike.

Here are some big ones to be aware of:

National Insurance (NI) freezes

The primary NI threshold (where employees start paying NI) was raised in 2022 to match the £12,570 personal allowance – finally some good news – but it's now locked there until 2028.

The employer NI threshold is also being held down: from 6 April 2025 the secondary threshold (the point at which employers start paying NI) dropped from £9,100 to £5,000.

As wages rise, a larger share of pay ends up attracting NI. Whilst the direct brunt of this cost is stomached by your employer, it means the cost of employing you increases. This results in less money being available for pay rises – you're the one that suffers in the end.

Inheritance tax band creep

The inheritance tax "nil-rate band" is the portion of your estate you can leave behind before HMRC comes sniffing around for its 40%. It’s currently stuck at £325,000 per person – a threshold that hasn’t budged since way back in 2009.

The residence nil-rate band, which provides an additional allowance for passing on a home, has been set at £175,000 since 2020. 

Both thresholds have been frozen until at least 2030. 

That means, right now, an individual can leave up to £500,000 tax-free if a home is included and it goes to children or grandchildren. Married couples and civil partnerships get £1 million between them. 

Sounds pretty generous on paper, but rising house prices mean more and more families are caught in the net. 

In 2022–23 alone, there were 31,500 estates paying inheritance tax – up 13% on the previous year. And with plans to include pensions in IHT from 2027, it’s thought that one in 10 estates will end up facing a bill by the close of the decade. That's £14.3 billion for the treasury coffers.

The chart below shows just how steeply inheritance tax receipts have risen – and are predicted to rise further – according to the OBR:

Source: OBR, Inheritance tax: latest forecast

The £50,000 Child Benefit trap

This one's more of a stealth benefit cut than a tax, but it fits the theme.

Since 2013, Child Benefit has been clawed back if either parent earns above a set threshold. That threshold was stuck at £50,000 for over a decade, only rising to £60,000 in 2024.

Now, your benefit is gradually reduced between £60,000 and £80,000, before disappearing entirely. 

Back in 2013, £50,000 was more like £70,000 in today's money, so relatively few families were caught out. 

Fast forward to today, and even though the threshold has since risen, it’s still around £20,000 less than it would be if it had kept pace with inflation.

As a result, many more middle-income families are being affected – with one in four losing some or all Child Benefit.

The savings allowance squeeze

The personal savings allowance (PSA) is the bit of your savings interest you can pocket tax-free. 

This allowance covers interest from a range of sources – banks, building societies, savings accounts, credit unions, even some trust funds.

For basic-rate taxpayers, it’s currently £1,000 a year; for higher-rate taxpayers, it drops to £500. Both figures have been frozen since the PSA was introduced in 2016. Anything above this is taxed at your usual income tax rate. 

If you’re an additional-rate taxpayer, it's even worse: there’s no allowance at all, meaning every penny of savings interest is taxed.

Here we have a double-whammy of fiscal drag.

Not only has the PSA itself been frozen for nearly a decade, but millions more people are being quietly dragged into higher tax brackets. 

So just as you’re celebrating that hard-earned pay rise, HMRC pops up to slice your savings allowance in half. Cheers!

As interest rates have risen, your savings earn more – but that only increases the odds of busting your allowance and handing more over to HMRC.

With regular savings accounts often offering better rates than cash ISAs, it’s easier than ever to end up with a chunk of your interest outside a tax wrapper – and straight into the taxman’s pocket.

Higher interest rates might sound better on paper, but they often coincide with higher inflation. Prices rise, rates then follow to try to rein things in, but you hand over an increased amount to the taxman because apparently that's how fairness works.

VAT: the invisible markup

VAT (Value Added Tax) is charged on most goods and services in the UK at 20%. It’s technically a consumption tax – you pay it when you spend, not when you earn.

Because it’s already baked into most prices, it’s often invisible in day-to-day life.

Businesses with a total taxable turnover of more than £90,000 must also register for VAT, which means they have to charge up to 20% on their sales and send it on to HMRC. For everyone else, it’s just another silent passenger on your shopping bill.

This is a tax with all sorts of odd quirks.

Buy a plain digestive and you won’t pay VAT (they’re zero-rated). Treat yourself to a chocolate-covered version and suddenly you’re hit with an extra 20%. Recent legal wrangling over the VAT status of a giant marshmallow even hinged on whether or not it’s eaten with your fingers.

Head here for more weird VAT quirks – plus some other historical taxes you won't believe existed – and impress and annoy your friends in equal measure with your new knowledge. You're welcome!

VAT has hopped up and down a bit over the years, too. Back in the 90s it was 17.5%, before being temporarily dropped to 15% in 2008 as a fiscal stimulus measure in the wake of the financial crisis, a decrease that lasted for one year.

Then-Chancellor George Osbourne raised it to 20% in 2011, and it's remained there ever since.

The government has pledged not to change it in the upcoming budget. But, just like with income tax, they don’t actually need to raise the rate to rake in more revenue. Government VAT receipts are on track to hit £180 billion in 2025–26 – that’s about £6,300 per household, and a staggering £60 billion more than in 2020.

Meanwhile, the price of almost everything has shot up. Inflation peaked at 11% in October 2022. While it’s slowed since then, that only means prices are rising less quickly, not falling.

At the same time, real wages have barely begun to creep upwards.

In practical terms, this means you’re paying more VAT on everything from your weekly shop to your boiler service. 

Because lower-income households spend a bigger chunk of their money on everyday goods and services, the rising VAT take hits them hardest. This is why some economists call it a "regressive" tax. 

And for businesses, rising prices mean having to charge more just to keep up, which pushes more firms over the £90,000 VAT threshold, with some end up turning away work as a result – intentionally being less productive so they can still compete on price and reduce annoying admin.

Capital Gains crunch

Capital Gains Tax (CGT) is the tax you pay when you sell investments or assets – like shares, funds, or a second home – for more than you paid for them. 

The tax-free allowance for capital gains has been on a wild ride: it rose steadily from £3,000 in 1981 all the way to £12,300 by 2020/21, but it’s been in sharp decline ever since.

In April 2023, the exemption was slashed in half to £6,000. By April 2024, it dropped again to just £3,000 – taking us right back to where we started in the early 80s (minus the shoulder pads and double-digit interest rates).

And it’s not just capital gains in the firing line. The tax-free dividend allowance – the amount you can receive before paying any tax – has been cut from £2,000 (2018–2023) to just £1,000 in 2023, and now sits at a measly £500. The number of people paying dividend tax has rocketed to an estimated 3.7 million in 2024/25, up from about 1.9 million two years prior – that's an extra 1.8 million of us.

This hits anyone earning dividends outside an ISA, especially business owners who pay themselves this way.

But is it really a stealth tax if they’re openly slashing allowances? Not in the classic sense – after all, these cuts have been front and centre in each Budget. 

But the effect is much the same: by lowering the amount you can pocket tax-free, the Treasury quietly pulls more people into the CGT and dividend tax net, with only occasional tinkering with the headline rates required.

How to spot stealth taxes in the budget

So, how can you tell if the upcoming Autumn Budget 2025 is hitting you with a stealth tax?

Here are a few tips (consider it your stealth-tax spotting guide... like bird-watching, but for tax policy instead of tits and robins).

Listen for the word "freeze" (or "maintain" or "no change")

If the Chancellor says something like "we will freeze the personal allowance" or "we will maintain current tax thresholds for an additional year," that's a red alert. Freezes are the quintessential stealth tax.

For instance, any announcement that income tax bands will stay at 2025 levels beyond April 2025 is effectively a tax hike, though these are already frozen until 2028.

Similarly, if they say there's no change to the inheritance tax nil-band or the child benefit threshold, that quietly means a real-terms cut (as inflation marches inexorably onwards).

Beware the disappearing allowances

Watch for any mention of allowances being reduced or eliminated. As we saw with dividends and CGT, slashing an allowance is a stealthy way to raise taxes.

If the Budget includes lines like "the dividend allowance will be removed" (a possibility, given a leaked memo suggesting an end to the current £500 allowance), or the "annual exempt amount for capital gains will remain at £3,000," that's code for "we're not adjusting for inflation; enjoy paying tax on small gains."

Another one: if they reduce the pensions annual allowance or reinstate a lower pensions lifetime allowance, that's a complex stealth tax on future retirees.

"No new taxes on working people"

The government has repeatedly promised no direct tax hikes on "ordinary working people." That might sound comforting, but it can be a bit of a linguistic sidestep.

For example, Reeves and the PM might say they're sticking to their manifesto pledge of no increase in the headline rates of income tax, VAT or National Insurance. They may genuinely keep that promise, but then turn around and tweak things like wealth taxes, property taxes, or indeed let inflation do the dirty work on income tax via freezes.

Check the Office for Budget Responsibility (OBR) report

After the Budget, the OBR publishes forecasts.

Look for their analysis of how much extra revenue is coming from threshold freezes or allowance changes – it's usually spelled out in there.

If you see a big number in the "latest outlook" section but the Chancellor didn't shout about it, you might have found a stealth tax.

Also, look for phrases in their report like "fiscal drag" if you want to find out where the sneakiest moves are lurking.

Bottom line

Keep your eyes peeled for a "steady as she goes" Budget. A Budget with no headline tax changes can easily be a trench coat wrapped around six stealth taxes standing on each other’s shoulders.

Those existing stealth measures – frozen thresholds, hidden allowances, and the rest – are still quietly doing their work, year by year, increasing your tax burden as your salary or assets grow.

Many experts argue that if the government needs more revenue to plug deficits or fund services, it should do so openly – more Good Morning Britain sofa chat, less Derren Brown wallet-disappearing act.

Perhaps what we really need is a transparent, well-thought-through debate, not the politically convenient, path-of-least-resistance approach that hits lower earners hardest while pretending nothing’s happened – like blaming the dog for eating your homework when you’ve still got paper stuck between your teeth.

Using an auto-enrolled work-based pension?

The fund you're contributing to might not be right for you

Send the info