As the UK basks in a summer of heatwaves and record temperatures, financial freezes continue to tighten consumers’ purse strings and squeeze household budgets.
Frozen thresholds act as stealth taxes that contribute to fiscal drag. As your wages and investment returns rise over time, frozen thresholds push you into higher bands. This might see your tax bill rise without a change to headline tax rates.
Financial planning can help you navigate these freezes, but first, let’s take a look at six of the main freezes your finances are contending with.
1. The nil-rate band
Gordon Brown was UK prime minister, and Susan Boyle’s Britain’s Got Talent audition had yet to air the last time the nil-rate band changed.
The main Inheritance Tax (IHT) nil-rate band has been frozen since 2009, a total of 17 years.
In 2026/27, the nil-rate band stands at £325,000. Had it risen with inflation over the last 17 years, however – and according to the Bank of England (BoE) inflation calculator – the nil-rate band would be around £530,000.
Depending on the value of your estate, IHT could be chargeable at 40% on the difference, which is a significant sum.
This freeze is one reason why the Treasury’s IHT take is expected to rise even higher between now and April 2031.
2. The residence nil-rate band
The residence nil-rate band was £100,000 when it was introduced in April 2017. For context, this was the year that Donald Trump was inaugurated for the first time and the Great British Bake Off moved from the BBC to Channel 4.
By 2020/21 it had reached £175,000, and it has remained there ever since, thanks to a freeze that is now extended until at least 2031.
The nil-rate and residence nil-rate bands, when combined, can increase your IHT-free threshold to £500,000 or £1 million if both allowances are unused and passed on in full on the death of a spouse or civil partner.
Note: this £1 million figure only applies in certain circumstances, which you can read about here
3. The annual exemption
HMRC’s annual gifting exemption currently stands at £3,000 and has done for the last 45 years.
Sir Geoffrey Howe increased the exemption from £1,000 in his 1981 Budget. Despite four decades of inflation, it hasn’t changed since.
IFA Magazine confirms that this has led to the exemption losing 78% of its value. This is based on cumulative inflation of 354%, and suggests the exemption would be worth £13,000 today.
The annual exemption is the amount you can gift each year without paying IHT on the gift. The exemption is individual to you and can be carried forward for up to a year, so you and your partner could gift £12,000 if neither of you used the allowance last year.
This makes it a useful way to lower the value of your estate while giving cash gifts to loved ones while you are still around to see the difference your gift makes.
4. Small gifts exemption
HMRC also allows you to give as many IHT-free “small gifts” as you like during your lifetime.
Small gifts are classed as those of £250 or less, but this figure has stood since April 1984, just a month into the national miners’ strike.
Had it risen with inflation, the exemption would be worth around £670 now, according to the BoE calculator.
5. The Personal Allowance
As part of the UK’s economic recovery from the coronavirus pandemic, Rishi Sunak used his 2021 Spring Budget to freeze several allowances (or to extend existing ones).
One such allowance was the Personal Allowance. This is the amount you can earn before Income Tax becomes payable. It is currently frozen at £12,570 until at least 2031.
As your earnings or pension payments increase over the next few years, more of your money will be subject to Income Tax. You might even find you are pushed into a higher tax bracket.
6. Income Tax bands
The main rates of Income Tax are also frozen until at least 2031.
You are currently taxed:
| Band | Taxable income | Tax rate |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
However, had these bands increased in line with inflation, the same table would look something like this:
| Band | Taxable income (approximate) | Tax rate |
| Basic rate | £16,000 to £64,000 | 20% |
| Higher rate | £64,001 to £159,400 | 40% |
| Additional rate | over £159,400 | 45% |
Source: BoE inflation calculator (based on figures as at 2021 compared to May 2026)
It’s clear from these figures how fiscal drag can affect your wealth and take-home pay over time, but financial planning can help.
Financial advice can help you plan for the future, whatever that future looks like
Your financial plan is robust and adaptable and based on Jane Smith Financial Planning’s years of experience in the financial services sector. We know that rules and legislation will change and tax allowances (whether rising, falling or remaining frozen) will affect your tax bill now and in the future.
From using cashflow modelling to help you visualise how changes to your budgeting now could affect outcomes, to managing ongoing risk, we can help to make sure your plan is based on the present reality. Doing so – while accounting for potential future changes – puts you in the best possible position to reach your goals.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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