What are Stealth taxes when it comes to the Autumn Budget 2025

Fuelled by inflation and rising wages, stealth taxes sneak up on you—hidden in plain sight, like the pothole on the school run that you drive over every morning, which is slowly damaging your alloy wheels.

As we approach the budget, there is a lot of discussion about major policy changes. However, what really deserves our attention are the quiet adjustments and freezes that can have just as much impact on your finances.

So, where exactly do these stealth taxes hide, and how can you recognise them in the Chancellor’s plans?

Fiscal drag – it affects everyone

Tax thresholds not rising with inflation can lead to more of your income being pulled into higher tax bands, even if your actual pay hasn’t increased in real terms. It’s like being stuck in the same job while your rent, Netflix subscription, and meal deal prices continue to rise.

Since 2021, the personal allowance for income tax—the amount you can earn before HMRC starts deducting taxes—has remained fixed at £12,570. The higher-rate band is also unchanged at £50,270, and in 2023, the additional rate was lowered from £150,000 to £125,140.

If you earn over £100,000, you begin to lose your personal allowance altogether, a threshold that hasn’t changed since it was introduced in 2010.

Historically, tax thresholds were expected to rise with inflation in a process known as “uprating” or “indexation.” For decades, particularly since the mid-1970s, this practice was consistently followed. However, the previous Conservative government, followed by the current Labour government, has decided to freeze these thresholds until at least 2028.

Who are the Winners and losers of fiscal drag

Almost everyone earning above the personal allowance of £12,570 is paying more tax each year, despite no increase in the headline rate of tax. In 2023 alone, basic-rate taxpayers were £500 worse off, while higher-rate taxpayers lost £1,000. By 2027, someone who earned £50,000 in 2022 could find themselves nearly £2,000 worse off due to frozen thresholds.

To put this into perspective, back in the 1990s, very few nurses and only 5 - 6% of teachers paid higher-rate tax. However, by the 2027-28 period, it is expected that more than one in eight nurses and 25% of teachers will be in this tax bracket.

The accompanying chart illustrates the significant increase in the number of taxpayers in this category over the past few decades.

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:

Who wins thanks to fiscal drag?

The Office for Budget Responsibility (OBR) estimates that freezing income tax bands will generate an additional £38.6 billion a year by 2029–30, significantly exceeding the initial forecast of £8 billion when the policy was first introduced. This amount is nearly equivalent to the annual GDP of Iceland, representing a hidden tax that effectively reduces your income each year without you being fully aware of the reason why.

Other stealth taxes hiding

Freezing income tax bands may be the government's most notable action, but it's not the only subtle change they are implementing. In recent years, there has been a gradual series of stealthy tax modifications aimed at raising billions without provoking the backlash that typically accompanies an official tax increase.

Here are some big ones to be aware of:

National Insurance (NI) freezes

The primary National Insurance (NI) threshold, where employees begin paying NI, was raised in 2022 to align with the personal allowance of £12,570. This is a positive change, but it will remain at this level until 2028.

Additionally, the secondary NI threshold, which determines when employers start paying NI, will decrease from £9,100 to £5,000 starting on 6 April 2025.

As wages increase, a larger portion of earnings becomes subject to NI contributions. Although your employer absorbs the direct cost of this increase, it ultimately raises the overall expense of employing you. As a result, there may be less money available for salary increases, meaning you could be the one who is affected negatively in the end.

Inheritance (IHT) tax band

The inheritance tax “nil-rate band” refers to the portion of your estate that you can pass on before HMRC starts charging its 40% tax. Currently, this threshold is set at £325,000 per person and has not changed since 2009.

Additionally, there is a residence nil-rate band that provides an extra allowance for passing on a home, which has been fixed at £175,000 since 2020. Both of these thresholds are frozen until at least 2030.

This means that an individual can leave up to £500,000 tax-free if their estate includes a home that is inherited by children or grandchildren. Married couples and civil partners can jointly pass on up to £1 million tax-free.

While this may seem generous, rising house prices have led to more families falling into the inheritance tax bracket. In the 2022–23 tax year, there were 31,500 estates that paid inheritance tax, which represents a 13% increase from the previous year. Furthermore, with plans to include pensions in inheritance tax starting in 2027, it is estimated that one in ten estates will face a tax bill by the end of the decade, potentially generating £14.3 billion for the Treasury.

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

The £50,000 Child Benefit limit

This situation can be seen as more of a stealth benefit cut than a tax, but it aligns with the overall theme.

Since 2013, Child Benefit has been reduced if either parent earns above a certain threshold. This threshold remained at £50,000 for over a decade, only increasing to £60,000 in 2024. Currently, benefits are gradually reduced for incomes between £60,000 and £80,000, before being eliminated entirely.

In 2013, £50,000 had the purchasing power equivalent to around £70,000 today, so relatively few families were affected at that time. Fast forward to today: despite the threshold increase, it remains approximately £20,000 lower than it would be if it had kept pace with inflation.

As a result, a growing number of middle-income families are impacted, with one in four losing some or all of their Child Benefit.

The personal savings allowance (PSA)

The personal savings allowance (PSA) allows you to keep a portion of your savings interest tax-free. This allowance applies to interest earned from various sources, including banks, building societies, savings accounts, credit unions, and some trust funds.

For basic-rate taxpayers, the PSA is currently set at £1,000 per year. For higher-rate taxpayers, it decreases to £500. Both amounts have remained unchanged since the PSA was introduced in 2016. Any interest earned above these thresholds is taxed at your regular income tax rate. If you are an additional-rate taxpayer, there is no allowance, meaning every penny of your savings interest is taxable.

This presents a double challenge, as the PSA has been frozen for nearly a decade, and millions of individuals are being quietly pushed into higher tax brackets. So, just when you may be celebrating a hard-earned pay rise, HMRC steps in and cuts your savings allowance in half.

While rising interest rates can increase your savings, they also raise the likelihood of exceeding your PSA limit, resulting in more tax paid to HMRC. With regular savings accounts often offering better rates than cash ISAs, it has become easier than ever to have a significant portion of your interest fall outside a tax wrapper and go directly to the taxman.

Though higher interest rates may seem beneficial, they often occur alongside increased inflation. As prices rise, interest rates typically follow suit to help control inflation, yet this leads to you paying a larger amount to the taxman because, apparently, that is how fairness is defined.

VAT

Value Added Tax (VAT) is charged on most goods and services in the UK at a rate of 20%. It is essentially a consumption tax, meaning you pay it when you spend money rather than when you earn it. Since VAT is typically included in the prices of goods and services, it often goes unnoticed in daily life.

Businesses with a total taxable turnover exceeding £90,000 are required to register for VAT. This means they must charge customers the 20% VAT on their sales and remit that amount to HM Revenue and Customs (HMRC). For those not required to register, VAT is merely a hidden cost included in shopping bills.

This tax has some unusual quirks. For example, buying a plain digestive biscuit incurs no VAT (it's zero-rated), but purchasing a chocolate-covered version means you will pay an additional 20% tax. There has even been legal debate over the VAT status of a giant marshmallow, depending on whether it's eaten with fingers.

VAT rates have fluctuated over the years. In the 1990s, the rate was set at 17.5% before being temporarily reduced to 15% in 2008 as part of a fiscal stimulus plan in response to the financial crisis; this reduced rate lasted for only one year. Then-Chancellor George Osborne raised the rate back to 20% in 2011, and it has remained there since.

The government has vowed not to change the VAT rate in the upcoming budget. However, much like income tax, the government does not need to increase the rate to generate more revenue. VAT receipts are projected to reach £180 billion by 2025–26, which averages to about £6,300 per household—an astonishing £60 billion increase compared to 2020.

Meanwhile, the prices of nearly everything have increased significantly. Inflation peaked at 11% in October 2022, and while it has slowed down since, this only means prices are rising at a slower rate, not decreasing. At the same time, real wages have barely begun to increase.

Practically speaking, this means you are paying more VAT on essentials, from your weekly grocery shopping to services like boiler repair. Since lower-income households tend to spend a larger portion of their income on everyday goods and services, the rising VAT burden impacts them the hardest. This is why some economists describe it as a "regressive" tax.

For businesses, increasing prices necessitate charging more just to keep up, which can push more firms over the £90,000 VAT threshold. Some businesses may even choose to limit their productivity to avoid crossing this threshold, enabling them to remain competitive on price while reducing the administrative burden associated with VAT.

Capital Gains

Capital Gains Tax (CGT) is the tax you owe when you sell investments or assets, such as shares, funds, or a second home, for more than you originally paid.

The tax-free allowance for capital gains has had a turbulent history: it steadily increased from £3,000 in 1981 to £12,300 by the 2020/21 tax year, but it has sharply declined since then. In April 2023, the exemption was reduced by half to £6,000. By April 2024, it will drop again to just £3,000, taking us back to levels not seen since the early 1980s (minus the shoulder pads and double-digit interest rates).

But it's not only capital gains that are impacted. The tax-free dividend allowance—the amount you can receive before paying any tax—has been cut from £2,000 (from 2018 to 2023) to £1,000 in 2023, and is now a mere £500. The number of people paying dividend tax has surged to an estimated 3.7 million in the 2024/25 tax year, up from about 1.9 million two years ago, meaning an additional 1.8 million people are now affected.

This change particularly impacts anyone earning dividends outside an Individual Savings Account (ISA), especially business owners who pay themselves this way.

However, is this really a stealth tax if these changes are being announced publicly? Not in the traditional sense—after all, these cuts have been front and center in each Budget announcement.

Nevertheless, the effect is similar: by reducing the amount you can keep tax-free, the Treasury gradually brings more individuals into the CGT and dividend tax net, with only occasional adjustments needed for the headline rates.

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 announces measures like "we will freeze the personal allowance" or "we will maintain current tax thresholds for an additional year," that should raise alarm bells. Freezes are a classic form of stealth tax.

For example, if it’s announced that income tax bands will remain at 2025 levels beyond April 2025, this effectively constitutes a tax increase, even though they are already frozen until 2028.

Similarly, if there is no change to the inheritance tax nil-rate band or the child benefit threshold, this quietly indicates a real-terms cut, as inflation continues to rise.

Disappearing allowances

 

Keep an eye out for any mentions of allowances being reduced or eliminated. As we observed with dividends and capital gains tax (CGT), cutting an allowance is a subtle way to raise taxes.

If the Budget includes statements like "the dividend allowance will be removed"—which is possible given a leaked memo suggesting the end of the current £500 allowance—or mentions that the "annual exempt amount for capital gains will remain at £3,000," this indicates that there will be no adjustments for inflation. Essentially, this means you can expect to pay tax on small gains.

Another point to watch for is if they reduce the pensions annual allowance or reinstate a lower pensions lifetime allowance. These changes would be a complex stealth tax on future retirees.

“No new taxes on working people”

The government has consistently assured the public that there will be no direct tax increases for "ordinary working people." While this may sound reassuring, it can also be somewhat misleading.

For instance, Reeves and the Prime Minister might claim they are upholding their manifesto commitment to avoid raising the main rates of income tax, VAT, or National Insurance. They might genuinely honor this promise, but they could still make adjustments to areas such as wealth taxes, property taxes, or allow inflation to undermine income tax by implementing freezes.

Check the Office for Budget Responsibility (OBR) report

After the Budget, the Office for Budget Responsibility (OBR) publishes its forecasts.

Be on the lookout for their analysis regarding the additional revenue generated from threshold freezes or changes in allowances—this is usually detailed in their report. If you notice a significant figure in the “latest outlook” section that the Chancellor didn’t mention, you may have discovered a stealth tax. Additionally, pay attention to phrases like “fiscal drag” in their report, as these can help identify where subtle tax increases may be hidden.

Conclusion

 

Stay alert for a “steady as she goes” Budget. A Budget that lacks major headline tax changes can easily conceal multiple stealth taxes. Existing stealth measures—such as frozen thresholds and hidden allowances—are continuously increasing your tax burden as your salary or assets grow.

Many experts argue that if the government needs to generate more revenue to address deficits or fund services, it should do so transparently.