There is much concern about the tax increases that chancellor Rachel Reeves might introduce in her upcoming autumn Budget, with speculation mostly focusing on inheritance tax and stamp duty.
Another set of taxes, however, is set to increase with no-one's intervention – stealth taxes that go up automatically and are unlikely to be mentioned in the Budget.
Every year, a number of tax thresholds and allowances simply don’t get updated, with some having remained frozen for 40 years. This means they get less generous as time and inflation take their course.
Sarah Coles, head of personal finance at Hargreaves Lansdown, identified 12 examples of thresholds and allowances that may not get any airtime during the Budget but still impact Britons’ finances.
Losing personal allowance
Those who earn more than £100,000 have their personal allowance cut by £1 for every £2 over this level. At a £125,140 salary, the allowance reaches zero – an effective tax rate of 60%.
“This threshold hasn't moved since it was introduced in April 2010. Over that time, wages have risen just over 64% so to keep pace, it would have had to rise to over £164,000,” Coles said.
“If a pay rise pushes you over the threshold, your tax bill will rise dramatically – without the government having to make a single announcement on the subject.”
High-income child benefit charge
People who receive child benefit and earn £60,000 or more need to repay some of it through self-assessment. Once you earn £80,000, you need to repay it all.
The charge was introduced in January 2013 at £50,000 but to keep up with inflation, it would have had to rise to more than £78,500.
The charge is “highly unlikely to make the speech”, but pay rises will continue to push people into the danger zone so they pay more and more of this charge.
Loss of tax-free childcare
Tax-free childcare worth up to £2,000 a year is available until one parent earns £100,000, at which point they no longer qualify.
The threshold hasn’t moved since 2017, but wages are up 45% since then. Today, the threshold would need to be almost £145,000 to keep pace.
“If the threshold isn’t moved with wages in the Budget, more people will pass it and lose the tax break,” Coles said.
Loss of free childcare hours
Parents of 3 and 4-year-olds who earn less than £100,000 have benefited from free childcare hours since 2017. The scheme then rolled out to younger children, but the same threshold remained in place.
Without an announcement of an uprating, yet more parents will pass the threshold and lose the benefit.
Income tax on earnings
Income tax thresholds were frozen in April 2021 at £12,570, which is the amount of income that goes untaxed. With wages rising 26% since then, the personal allowance would have had to rise to £15,838. The same logic applies to the higher rate threshold.
“We’re unlikely to hear about this tax unless the current freeze is extended but, even if it isn’t mentioned, yet more damage will be done as more pay rises push more people into paying higher rates of tax,” Coles said.
IHT nil rate bands
Estates valued below £325,000 and residences below £175,000 (the nil-rate bands) don’t pay inheritance tax (IHT). Both these thresholds have been frozen until 2030, meaning that rises in the value of investments, savings and property will push more of people's estates into tax-paying territory.
“The government doesn’t need to say anything in the Budget, because rising asset values will do the work for them,” Coles noted.
IHT gifting allowances
Rarely mentioned in the Budget, gifting allowances “hardly ever move”.
The annual gifting allowance of £3,000 hasn’t moved since 1981 and never comes up in the Budget speech, Coles said. By leaving it untouched, it stops people from doing more to protect themselves from inheritance tax, so “another year out of the spotlight would mean more estates paying more tax”.
Dividend tax allowance
Higher inflation means dividends from investments will tend to rise each year, so failing to announce an inflation-linked rise means automatically pushing more people over their allowance.
Coles said that the cuts made by the former government have done serious damage, but the current government could make the tax bite harder by saying nothing.
Capital gains tax allowance
Similar to dividends, capital gains taxes are on the rise.
As Coles explained, “previous cuts and then the hiking of the rate have caused more pain”, but the government doesn’t need to make any changes in order to hit investors harder as a frozen allowance and rising asset values will do the work for them.
Stamp duty thresholds
Stamp duty on house purchases has changed more than once; however, the threshold was £125,000 in 2006 – the same as today. Meanwhile, average house prices have risen by more than £100,000.
“If the thresholds don’t get uprated in the Budget with house prices, and prices keep rising, tax bills for house buyers will increase,” Coles said.
VAT tax take will rise
The VAT rate is the same as it was in 2011 and the government has pledged not to change it in the Budget.
However, it needn’t change it to rake in more money, with inflation doing all the work.
As Coles explained, inflation means consumers spend more, and as VAT is a proportion of what they spend, the amount of tax paid automatically rises.
ISA allowance
The £20,000 limit to tax-free personal savings and investments has applied since 2017.
There is a concern that changes to the cash ISA limit could make benefits less generous, dealing “a horrible blow” to savers.
Coles’ view was that the overall allowance is likely to remain in place, but even if there are no changes, “inflation has eaten away at the real value of the limit, leaving more of people’s savings and investments vulnerable to tax.”