A stealth tax is not an explicit increase in the rate of tax that you pay. However, it means you will likely pay more tax over time and that HMRC will collect more revenue.
Stealth taxes are usually implemented by freezing the thresholds at which you start to pay tax or adjusting allowances. As inflation, asset values, and wages rise, keeping tax thresholds stagnant means paying a larger share of income and wealth in taxes relative to typical levels.
So how might stealth taxes affect your financial plan, and what can you do about it?
Income
The personal allowance, or the amount that you can earn free of tax, will be frozen at £12,570 until 2031. Higher and additional rate tax thresholds will also be frozen, at £50,271 and £125,140 respectively.
If you earn over £100,000, you start to lose your personal allowance, which results in an effective tax rate of 60% on income between £100,000 and £125,140. This threshold has already been frozen for several years.
While this might not make much difference to your budget year on year, over 5 years, it will mean you pay significantly more tax. For example, if you earned £12,000 per year in 2021, you would have been a non-taxpayer.
Although your income has increased, higher prices mean your buying power won’t improve, and you may still pay substantially more tax.
The threshold at which child benefit starts to be reclaimed via tax is £60,000 (adjusted net income).
To reduce the impact of stealth income taxes, some options are:
- Pay more into a pension, as this can reduce taxable earnings and take you into a lower tax bracket.
- Keep careful control of your budget. While the overall cost of living may rise, aim to reduce your discretionary spending.
Investments
If you earn an income from your savings and investments, you have the following allowances to set against your tax bill:
- A dividend allowance of £500
- A personal savings allowance of £1,000 (reduced to £500 for higher rate taxpayers, and nil for additional rate taxpayers)
- If your other earnings are less than £17,570, up to £5,000 of savings income could be tax-free.
Yet, with allowances remaining unchanged and interest rates potentially rising, you could end up paying more tax on your investments.
Additionally, the capital gains tax threshold is £3,000 (per year). You can reduce tax on your investments by:
- Making use of your ISA allowance of £20,000 per year. You can also invest up to £9,000 per year into a Junior ISA for children.
- Using your capital gains exemption every year. This can prevent large gains from accumulating and becoming taxable when you eventually need to withdraw money.
- Using investment bonds, as you only incur tax when you create a chargeable gain, e.g. by making a withdrawal.
- Allocating investments between spouses to make use of both allowances.
- Higher risk investments such as Venture Capital Trusts and Enterprise Investment Schemes can help to save tax, although they are not suitable for everyone and advice is recommended.
Property
Property prices have continued to rise, while stamp duty thresholds in England and Northern Ireland have largely reverted to their lower long-standing levels.
Although temporary pandemic relief provided some short-term help, buyers in 2026 should expect significantly higher upfront tax bills, particularly as the nil-rate band remains frozen at £125,000 for most purchasers.
Additionally, landlords and second homeowners will continue to pay stamp duty surcharges and capital gains tax, with no changes to the rates or thresholds.
If you need to move home, there isn’t much you can do other than stay within your budget, consider moving to a cheaper area, and seek a competitive mortgage deal. Ultimately, it might make more sense to improve your current property than move elsewhere.
Property investors can make their affairs more tax-efficient by using a limited company. This can be complex, and advice is recommended.
As the tax landscape has become less favourable to property investors, you may want to consider diversifying your portfolio and investing in other asset classes.
Pensions
There are a number of limitations on pension funding:
- Those with relevant UK earnings can contribute up to the level of their salary or trading profits.
- Personal and employer contributions are further capped by the annual allowance of £60,000. However, this can be carried forward by up to three tax years if it has not been used, and you have been a member of a pension scheme.
- Higher earners and anyone who has taken taxable benefits from their pension have a reduced annual allowance.
As earnings, pension contributions, and fund values increase, freezing pension allowances can mean that you build up a smaller pension pot.
Ways you could optimise your retirement plan are:
- Continue contributing as much as you can, based on your affordability and available allowances.
- Review your contributions and projected fund values. You can make adjustments if you are likely to breach allowances.
- Consider other options, such as ISAs or bonds, to contribute towards your retirement.
Estate Planning
The nil rate band is currently £325,000, and has been frozen for well over a decade. This means that, without careful planning, anyone with an estate valued above this level (or a couple with assets of over £650,000) will likely pay 40% tax on the excess.
House prices alone mean that many more families are being impacted by Inheritance Tax (IHT), which at one point, was only a concern for the wealthy. This has been mitigated by the Residence Nil Rate Band, which extends the tax-free amount by up to £175,000 per person when the estate includes a family home.
As there are no planned increases at the moment and estate values will likely continue to rise, the impact of IHT will become even more widespread.
Some options to reduce your IHT liability are:
- Make gifts during your lifetime. There are several allowances available. However, most large gifts will remain in your estate for seven years.
- Place money in trust for your beneficiaries.
- Invest in unlisted companies, Alternative Investment Market (AIM) shares or even your own business.
Please don’t hesitate to contact a member of the team to find out more about effective tax planning.
The content in this article was correct on 20/02/2026.
The value of pensions and investments and the income they produce can go down as well as up and you may not get back the full amount that you originally invested.
Innovative Finance ISA is a high risk investment do not invest unless you’re prepared to lose all the money you invest, you are unlikely to be protected if something goes wrong.
The Financial Conduct Authority does not regulate Estate Planning or Tax Planning.
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