Frozen Tax Bands – How Do They Affect You?
Have you ever heard of a “stealth tax”? This occurs when the government raises your tax bill, often without your noticing. In 2025, the most important stealth tax to UK households is arguably the freeze to income tax bands.
In this article, our financial advisers explain the nature of the tax band freeze, how it affects you, and ideas to mitigate the impact on your finances. We hope these insights are helpful. Please contact us to discuss your own financial goals and situation with an adviser here at Castlegate.
What Is the Income Tax Threshold Freeze?
When do you last remember the UK government raising or lowering income tax rates? They have certainly been stable for some time now. However, UK income tax revenues have shown consistent year-on-year growth over the past two decades.
In 2004-05, the government raised £375.8 billion in tax revenues (including VAT, income tax and National Insurance contributions). By 2023-24, revenues rose to £828.9 billion, partly due to “fiscal drag” – i.e. the freezing of income tax thresholds, resulting in more individuals moving into higher tax brackets as their incomes rise.
In theory, income tax thresholds should be reviewed annually and rise in line with inflation to preserve taxpayers’ spending power. However, since April 2021, the UK government has fixed these thresholds, announcing that they will remain frozen until at least April 2028.
Most thresholds have been fixed at the following rates since 2021-22:
- Personal allowance (0% tax): up to £12,570
- Basic rate (20%): £12,571 to £50,270
- Higher rate (40%): £50,271 to £125,140
- Additional rate (45%): over £125,140
The last is a notable exception, with the 45% threshold lowered from £150,000 to £125,141 in the 2023-24 tax year.
The Hidden Impact of the Freeze
At first glance, the freeze to income tax bands may seem insignificant. After all, if you pay the 20% basic rate, at least you are not paying 21%, 22% or more due to a change in legislation. However, if your wage rises even just to keep up with inflation, so could your income tax bill.
The terrible result for many workers is that their “real” income can fall over time, even if their salary appears to be rising modestly on their paycheque. For instance, suppose someone earns £52,000 in 2023. They receive a 2.5% pay rise in 2024 to keep up with inflation, bringing their salary up to £53,300.
At this point, the taxpayer crosses the 40% higher rate threshold, creating a series of knock-on effects for their finances. In particular, their tax-free Personal Savings Allowance (PSA) lowers from £1,000 to £500. Tax rates on savings and investments also rise – e.g. to 40% on interest (vs 20% for basic rate) and 33.75% for dividends (vs 8.75% for basic rate).
In short, if your salary rises and you cross into a new tax band, your post-tax income won’t rise as quickly. Indeed, it may even decrease in real terms.
Strategies to Mitigate the Freeze
If your total income is nearing a higher tax band, it may be time to explore your options with a financial adviser. Fortunately, there are still some effective ways to avoid common traps and preserve your spending power.
For parents, one such trap is the High Income Child Benefit Charge (HICBC). If you claim (or want to claim) Child Benefit, please note that you must repay part (or all) of it if at least one parent earns more than £60,000.
This is another threshold that has been frozen, and it has a distorting effect on many household finances. For instance, a family with two parents earning £60,000 will avoid the HICBC, but a family with one person earning £120,000 will lose all of it (despite the same household income).
Parents with young children might want to factor this reality into their household financial plan. For some couples, one option might be to explore joint childcare arrangements, such as having both parents work a 4-day week to keep each person’s income below £60,000.
Another pitfall to watch out for is the “60% tax trap”. This can occur when someone earns over £100,000; at which point, their tax-free Personal Allowance is eroded by £1 for every £2 earned over the threshold. At £125,140, the allowance is effectively depleted.
Pensions can be particularly useful to mitigate this. For example, suppose your salary is set at £110,000 in 2024-25, which would reduce your Personal Allowance by £5,000. However, to get the full allowance back, you could divert £10,000 straight into a pension.
Business owners might have additional options. In particular, structuring your ratio of dividends versus salary could result in a higher take-home income (after tax). However, consider speaking with an adviser to get the balance right, as there can be knock-on effects for your wider financial plan (e.g. your eligibility for a mortgage).
We hope these insights have been valuable and inspiring. If you want to make sure you are taking the right steps to safeguard your financial future, please get in touch.
Please note:
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. This content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.
