How much could frozen tax thresholds be costing you?

Some tax thresholds and allowances in England and Wales have been held at the same level for years — and, in one case, for more than four decades. 

When these limits don’t move in line with inflation, more people end up paying tax, or paying more than before, even though tax rates haven’t changed. 

An analysis by Interactive Investor, an investment and pension platform, shows that some allowances would now be significantly higher if they’d risen with inflation. In cash terms, the difference runs into thousands of pounds.

Here Which? dives into the findings to see which thresholds and allowances have stayed the same the longest, how much higher they'd be today, and the steps you can take to reduce the impact.

Which tax thresholds have been held for the longest?

Interactive Investor has compared current thresholds with what they would be if they’d kept pace with inflation – here’s how they stack up. 

• Find out more: how to pay less tax 

Do allowances have to rise by inflation?

There’s no rule that tax thresholds or allowances must rise with inflation. Some have been increased regularly in the past, but this is a political choice, not a legal requirement.

When they stay the same while wages rise, more people are pulled into paying tax or into higher bands – a process often called 'fiscal drag.'

• Find out more: inflation-busting savings accounts

What this means for income tax

The personal allowance is the amount you can earn before paying income tax – £12,570. The higher‑rate threshold is when income is taxed at 40% – £50,270.

These have been unchanged since 2021. According to the Office for Budget Responsibility, 3.5 million more people will move into the higher‑rate band by 2028-29. There are now 8.3 million higher and additional‑rate taxpayers, up from 5.7 million in 2022-23.

The personal allowance taper reduces your allowance by £1 for every £2 earned above £100,000, removing it entirely at £125,140. This means that income within this range can effectively be taxed at 60% once the taper is factored in.

Tip: use salary sacrifice

Salary sacrifice enables you to give up part of your salary in exchange for an employer pension contribution. This can help reduce your taxable income and avoid tipping into the higher rate or the personal allowance taper.

• Find out more: how salary sacrifice works

What this means for savings?

The personal savings allowance has been £1,000 for basic‑rate taxpayers, £500 for higher‑rate taxpayers and zero for additional‑rate taxpayers since 2016.

The freeze went largely unnoticed when interest rates were low, but with the Bank of England base rate rising sharply in recent years, more savers are now exceeding their limits.

According to HMRC estimates, more than 2 million savers will pay tax on their interest this year – up from 1.9 million in 2023-24 and just 647,000 in 2021-22.

Tip: open a cash Isa 

Cash Isas work like savings accounts, but interest earned inside them is tax‑free. You can put up to £20,000 into ISAs each tax year. Any unused allowance doesn’t roll over, so you need to use it by 5 April or lose it.

• Find out more: best cash Isas 2025

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What does this mean for inheritance tax?

Most estates don’t pay Inheritance Tax (IHT) – but frozen thresholds and rising house prices mean more are being caught. 

The annual gifting allowance has been £3,000 since 1981. You can give away this amount each year without it adding to the value of your estate.

The main nil‑rate band has been £325,000 since 2009. The residence nil‑rate band of £175,000 applies when a home is left to a direct descendant, such as a child, stepchild or grandchild. It tapers for estates over £2m and doesn’t apply if the property is left to other beneficiaries.

Tip: use allowances during your lifetime

 Making use of gifting allowances while you’re alive can help reduce the value of your estate and keep it below the IHT thresholds. This can include the annual gifting allowance, small gift exemptions and wedding gift exemptions.

• Find out more: ways to avoid inheritance tax

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What about capital gains and dividends?

Although many thresholds have been frozen, Capital Gains Tax (CGT) allowance has gone the other way – it’s been cut in consecutive tax years.

CGT applies when you sell certain assets, such as shares, funds or second properties, for more than you paid. The tax is charged on the profit (the gain), not the total sale value. 

The annual exemption fell from £12,300 in 2022-23 to £6,000 in 2023-24, and again to £3,000 in 2024-25. 

HMRC estimates that around 87,000 more people became liable after the first cut, taking the total to 378,000.

The dividend allowance (the amount you can receive tax‑free) has also been reduced. It was £2,000 in 2022-23, fell to £1,000 in 2023-24, and is now £500. Dividends are payments to shareholders from company profits, so more investors - even those with modest holdings - are now likely to pay tax.

Tip: make sure you use allowances and losses

You can choose when to sell assets, so it can make sense to spread sales across tax years to use the CGT allowance each year. Losses can be offset against gains to reduce your bill and if losses are greater than gains, you can carry them forward for future years. 

• Find out more:  capital gains tax rates and allowances