Awful April: Brace for a Wave of Stealth Tax Rises
As April arrives, the new tax year is set to usher in a significant wave of tax increases, despite the absence of any headline rate changes. Frozen thresholds, shrinking allowances, and tighter reliefs will collectively hit families, workers, and savers across the UK. This financial squeeze comes at a particularly challenging time, with Brits also facing rising household bills and heightened economic uncertainty due to the ongoing impact of the Iran war.
The Income Tax Trap Intensifies
Since the run-up to the 2025 Autumn Budget, discussions about the income tax trap have gained momentum, with many families scrambling to organize their finances to avoid being dragged into higher tax bands. While income tax rates remained unchanged in last year's Budget, the threshold freeze is set to continue until at least 2031, significantly intensifying fiscal drag.
HMRC estimates reveal that a record 2 million people will earn over £100,000 in the incoming tax year, up from 1.9 million this year. This means approximately six per cent of the workforce will begin the year either in or on the edge of the tax trap. Crossing this threshold triggers the tapering of the personal allowance, creating an effective 60 per cent marginal tax rate on income between £100,000 and £125,140. This can turn bonuses and pay rises into unexpected tax shocks for many earners.
Inheritance Tax Bill Concerns
The new tax year also starts with frozen inheritance tax thresholds, which remain at £325,000 for the nil rate band and £175,000 for the residence nil rate band. These thresholds do not account for potential increases in property and asset values, meaning more estates could be pulled into the tax net.
Rathbones estimates that more than 3,500 estates could face inheritance tax bills exceeding £500,000 by the end of the current tax year, a significant rise from 2,520 estates in the 2021 to 2022 tax year. Olly Cheng, financial planning divisional lead at Rathbones, commented: "Each new tax year quietly brings more families into the inheritance tax net. With thresholds frozen and asset values rising, IHT is no longer just a concern for the ultra-wealthy."
Cheng further warned that the issue is set to intensify from April 2027, when pension assets are brought into scope. This change could pull even relatively modest estates into the inheritance tax net, adding urgency for families to plan ahead, especially as many seek to support younger generations facing financial pressures like property purchases and university fees.
Dividend and VCT Changes
Dividend tax is also increasing by two percentage points for most investors, tightening the tax net on income held outside tax-free wrappers such as pensions and ISAs. The changes are as follows:
- Basic rate taxpayers will see an increase from 8.75 per cent to 10.75 per cent.
- Higher rate taxpayers will face a rise from 33.75 per cent to 35.75 per cent.
- Additional rate taxpayers will continue to be taxed at 39.35 per cent.
This increase means business owners who pay themselves through dividends should review their numbers more carefully, as the tax advantage has been narrowed. Additionally, Venture Capital Trust tax relief will be reduced from 30 per cent to 20 per cent, and inheritance tax relief on qualifying AIM shares will fall from 100 per cent to 50 per cent.
Isabella Galliers-Pratt, investment director at Rathbones, noted: "AIM shares and VCTs haven't lost their place entirely, but the tax advantages that once justified the risk have been diluted. For many investors, the sums involved, including the prospect of a six-figure inheritance tax bill, mean these decisions now demand far more scrutiny."
What to Do Before April 6
For those with income hovering around £100,000, it is wise to check bonuses, pay rises, or benefits that could push total income over the threshold. One strategy is to explore potential salary sacrifice schemes to reduce taxable income, though these schemes have also been under scrutiny by the Chancellor.
Other actionable steps include:
- Make use of remaining ISA allowances before they reset, particularly for investments held outside tax-efficient wrappers, including dividend income.
- Savers should assess their inheritance tax exposure by reviewing estate values, as rising property prices can bring estates closer to inheritance tax thresholds.
- Take stock of financial plans both before and after the new tax year to ensure finances are in the best possible shape, as the stealth tax squeeze may not be immediately felt but can accumulate over time.
As Cheng emphasized, "The danger is people don't feel the squeeze until the year is already underway, which is why it's so important to take stock before and after the new tax year to get finances in the best possible shape." With these stealth taxes set to impact millions, proactive financial planning has never been more critical.
