Tax Thresholds Frozen Since the 1980s - Here's the Expected Adjustment Over Time
UK Tax Thresholds Remain Frozen, Boosting Government Revenue and Creating Fiscal Drag
The freezing of tax thresholds in the UK, particularly for inheritance tax, income tax, capital gains tax, and dividend allowance, has a long history and significant fiscal and social impacts. Freezing these thresholds means the monetary levels at which tax rates or allowances apply remain fixed rather than being adjusted upwards in line with inflation or wage growth. This results in "fiscal drag," where taxpayers are pushed into higher tax bands or pay more tax on nominal gains without a real increase in income or wealth.
History of Tax Threshold Freezing in the UK:
- Inheritance Tax: The nil-rate band—the tax-free inheritance tax (IHT) threshold—has been frozen at £325,000 since 2009. This threshold has not kept pace with rising property values and inflation, causing more estates to exceed this level and become liable for IHT, thus increasing revenue from this tax. Before 2009, the band was adjusted periodically but has been fixed since then. Additionally, the annual gifting allowance for inheritance tax has been frozen since 1981 at £3,000, remaining unchanged for over four decades.
- Income Tax: Income tax thresholds (such as the personal allowance and higher-rate thresholds) have often been frozen or uprated very slowly, increasing the number of people liable for higher tax bands over time. Currently, this threshold freeze is expected to continue until at least 2028, which will drag about two million more workers into higher tax bands. This drag occurs despite real earnings remaining flat or growing modestly, meaning more nominal income is taxable.
- Capital Gains Tax and Dividend Allowance: While specific freezing dates for capital gains tax (CGT) thresholds and dividend allowances were not detailed in the search results, they have also seen freezes or minimal uprating in recent years. This again enhances fiscal drag by increasing taxes paid on nominal gains or dividends that may not have improved in real terms.
Impact of Frozen Tax Thresholds:
- Rising Tax Revenues: Freezing thresholds, especially the inheritance tax nil-rate band, has led to increased government tax receipts as rising asset and property values push more estates above the threshold.
- Increased Tax Burden on Retirees and Pensioners: As pension incomes and the State Pension increase, frozen thresholds mean more retirees pay income tax for the first time.
- Penalizing Savings and Investments: The freezing of allowances like the dividend allowance and capital gains thresholds contributes to higher tax bills on investments, discouraging savers and complicating tax planning.
- Social and Political Consequences: The threshold freezes tend to disproportionately affect individuals on fixed incomes (e.g., pensioners) or those with assets appreciating faster than inflation (homeowners, investors). They can also be seen as regressive because they raise taxes without explicit rate increases. Some critics argue the current structure penalizes childless couples who do not qualify for the residence nil rate band introduced in 2017.
- Government Revenue and Policy: Governments have used freezing tax thresholds as a tool to increase revenues without raising headline tax rates. It is described as a 'stealth tax' because the effect accumulates gradually as inflation and incomes rise.
Summary Table of Key Frozen Thresholds
| Tax Type | Threshold/Frozen Level | Since | Impact | |------------------------|--------------------------------------------|-------------|---------------------------------------------------------| | Inheritance Tax nil-rate band | £325,000 nil-rate band | 2009 | More estates liable for tax, higher IHT receipts | | Inheritance Tax annual gifting allowance | £3,000 | 1981 | Reduced gift exemption in real terms | | Income Tax personal allowance and bands | Frozen, due to continue until 2028 | Recent years| Increased taxpayers in higher bands, pensioner tax rise | | Dividend Allowance | Frozen or minimally uprated (unspecified) | Recent years| Higher tax on dividend income | | Capital Gains Tax threshold | Frozen or minimal changes (unspecified) | Recent years| Increased taxes on nominal gains |
The freeze of tax thresholds thus serves as a significant fiscal policy lever that has increased tax revenues from inheritance, income, and investment-related taxes while imposing a heavier tax burden on many individuals due to inflation and asset price effects, despite static nominal thresholds.
- The frozen inheritance tax nil-rate band of £325,000 since 2009, coupled with the annual gifting allowance frozen since 1981, has led to more estates exceeding the threshold, resulting in higher inheritance tax receipts for the government.
- The freeze on income tax personal allowance and bands, expected to continue until at least 2028, will push more taxpayers into higher tax bands, generating additional income for the government regardless of real earnings growth or inflation.
- The minimal uprating of the dividend allowance and capital gains tax thresholds in recent years has led to a higher tax bill on dividend income and nominal capital gains, respectively, stifling savings and investments for personal finance purposes.
