What frozen tax thresholds would be now – including an allowance which hasn’t risen in 45 years
Certain tax allowances would be almost four times higher if they had kept pace with inflation
Sam Walker
Tax thresholds frozen since as far back as the 1980s are dragging more and more people into HMRC’s tax net.
A number of allowances and bands would be hundreds of thousands of pounds higher had they kept up with inflation, which would have let people shield more of their money from the taxman.
One allowance – the inheritance tax gifting allowance – would be worth almost four times as much had it kept up with the rising cost of living, analysis from MoneyWeek has found.
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The phenomenon, known as fiscal drag, means taxpayers are having to part with more of their money as incomes rise while thresholds stay frozen.
Shaun Moore, tax and financial planning expert at wealth manager Quilter, said: “Frozen thresholds are redrawing the shape of the nation’s taxpayers.
“Roles not traditionally associated with higher-rate tax, such as experienced teachers, nurses and other public sector professionals, are increasingly being pulled into higher bands because thresholds have failed to keep pace with earnings.”
What tax thresholds have been frozen the longest though, and how much would they be worth now if they had kept up with inflation?
Which tax threshold has been frozen for the longest?
| Row 0 - Cell 0 | Frozen since | Frozen for | Current threshold | Should be | Difference |
IHT annual gifting allowance | April 1981 | 45 years | £3,000 | £11,785 | £8,785 |
IHT nil-rate band | April 2009 | 17 years | £325,000 | £528,432 | £203,432 |
Income tax 60% tax trap | April 2010 | 16 years | £100,000 | £157,403 | £57,403 |
Savings allowance: Basic rate | April 2016 | 10 years | £1,000 | £1,398 | £398 |
Savings allowance: Higher rate | April 2016 | 10 years | £500 | £699 | £199 |
Inheritance tax residence nil-rate band | April 2020 | 6 years | £175,000 | £226,531 | £51,531 |
Income tax basic rate threshold | April 2021 | 5 years | £12,570 | £15,861 | £3,291 |
Income tax higher rate threshold | April 2021 | 5 years | £50,270 | £63,431 | £13,161 |
Credit: Gov.uk and based on inflation calculations done via Bank of England website
Inheritance tax annual gifting allowance
The inheritance tax (IHT) annual gifting allowance has been frozen at £3,000 per year since 1981.
Had it risen in line with inflation, it would now be worth £11,785 per year, based on the Bank of England’s inflation calculator, almost four times as much.
Duncan Mitchell-Innes, partner and deputy head of private client at TWM Solicitors, said: “The tax-free gift allowance was designed to let people give meaningful gifts to their loved ones without leaving them facing a tax bill on death. Today, it is becoming increasingly insignificant.”
In practice, a £3,000 gift in April 1981 would help pay 15% towards the cost of an average UK home, which was around £19,800 according to Land Registry data. Now, it would cover just 1%, based on an average property price of £268,000.
Inheritance tax nil-rate band and residence nil-rate band
The nil-rate inheritance tax band has been frozen at £325,000 since 2009 – a core reason why inheritance tax receipts are increasing year on year, as rising asset prices are tipping more estates into IHT territory.
The introduction of the residence nil-rate band in 2017 increased the tax-free threshold for many homeowners, but this allowance has not budged since 2020.
Also, unless you leave your family home to direct descendants, such as children and grandchildren, you don’t qualify for the residence nil-rate band, penalising childless couples, and it starts to taper away once your estate exceeds £2 million.
60% income tax trap
The 60% income tax trap, which happens when your income exceeds £100,000, is also affecting more people due to frozen thresholds.
For every £2 of taxable income you earn above £100,000, you lose £1 of your personal allowance – which currently stands at £12,570. This tapering continues until your income reaches £125,140, at which point the entire personal allowance is lost.
This tax threshold has been held at this level for 16 years. In today’s terms, taking inflation into account, it could have moved from £100,000 to just over £157,000.
Moore, from Quilter, said: “With [the £100k] threshold frozen, more professionals will be caught after a pay rise, bonus or promotion that leaves them with far less extra income than expected.
“For parents, the hit can be even more severe. Crossing the £100,000 threshold can also mean losing access to valuable childcare support, including funded nursery hours and tax-free childcare.
“That turns the threshold into a brake on ambition, with some parents forced to question whether extra responsibility is worth it if the reward is largely swallowed by tax and lost childcare help.”
Those falling into the 60% tax trap can manage the impact by upping salary sacrifice contributions to keep their taxable income below the £100,000 threshold.
Do note, from April 2029, the government will cap National Insurance relief on pension contributions made through salary sacrifice at £2,000 per year.
Personal savings allowance
Fiscal drag has not gone unnoticed by the Office for Budget Responsibility. In its latest fiscal risks and sustainability report it pointed out 3.5 million more individuals are going to be pulled into the higher-rate tax band of 40% by 2028/29.
The impact is going to be significant on savers, as any basic-rate taxpayer who moves up to the higher-rate tax bracket at 40% will see their personal savings allowance (PSA) halved, from £1,000 worth of savings interest tax-free each year to just £500.
In 2023/24, there were 5.76 million higher rate taxpayers, an increase of 654,000 from 2022/23, according to the latest figures from HMRC. Meanwhile, over the same time period, the number of additional rate taxpayers rose by 324,000 to 893,000.
While income tax bands are set to remain frozen until April 2031, the personal savings allowance hasn’t been uprated since it came in in 2016.
Rachel Springall, finance expert at data firm Moneyfactscompare, said while many have been protected from tax on their savings since the PSA launched, it is now “outdated and needs to change”.
Springall added: “Interest rates are higher than back then, and more savers are expected to see their savings income taxed in the years ahead due to fiscal drag.”
Income tax thresholds
Both the basic and higher rate income tax thresholds have been frozen at their current levels since 2021. Then chancellor Rishi Sunak opted to freeze the thresholds at his March 2021 Budget.
The freeze was due to hold until 2026, but was extended by Jeremy Hunt to 2028, then again by Rachel Reeves until 2031 as part of her 2025 Autumn Budget.
It means the personal allowance has stayed at £12,570 and the higher rate threshold at £50,270. Had both risen in line with inflation, they would be worth £15,861 and £63,431, respectively, today.
