Threshold freezes have played a prominent role in the government’s economic agenda in recent years, especially post-Covid. Many high-profile freezes – to Income Tax bands, the Personal Allowance, and Inheritance Tax nil-rate bands – are effectively stealth taxes.
They are responsible for fiscal drag – a process by which the government can increase its overall tax take without raising headline rates.
Keep reading for a look at some of the main frozen allowances that could affect you this summer and how planning can mitigate the impact of these freezes.
The main Inheritance Tax nil-rate band has been frozen for 17 years
In 2009, the threshold above which IHT generally becomes payable was set at £325,000. It remains at that level today (2026/27).
Had the threshold risen with inflation, according to the Bank of England (BoE) inflation calculator, the nil-rate band would now stand at around £530,000.
That means your estate is effectively liable for 40% on an additional £205,000 compared to if the freeze were not in place – around £83,000.
It’s worth noting that the residence nil-rate band was introduced in April 2017. This increases your IHT-free threshold to £500,000 (as at 2026/27), but only if you leave your main residence to a direct descendant such as a child or grandchild.
The residence nil-rate band increased in line with inflation for four years until it was frozen at its current level of £175,000 in 2021/22. Had it increased in line with inflation that year, and every year since, it would be worth £228,000 today – an increase of £53,000.
Spouses can pass on unused nil-rate bands, meaning that, in some circumstances, couples have a combined IHT-free threshold of £1 million. Without threshold freezes, this would stand at more than £1.5 million. That’s a potential £200,000 more added to your IHT bill (40% of £500,000).
And that’s without considering the residence nil-rate taper effective for estates valued at more than £2 million.
The annual HMRC gifting exemption has suffered a decades-long freeze
You can gift £3,000 a year IHT-free using HMRC’s annual gifting exemption. This amount can be gifted to one person or split between multiple recipients, and any unused allowance can be carried forward for one tax year.
The £3,000 figure has remained the same since 1981 – that’s 45 years.
In those 45 years, the allowance has lost 78% of its value and, had it risen with inflation, would stand at around £11,900 today. And remember, that’s an annual allowance.
This would allow you to gift significantly more to your loved ones during your lifetime and, in so doing, reduce the value of your estate for IHT calculations.
While the allowance is worth comparatively less than when it was first introduced, it is per individual, and carry forward rules mean that you and your partner could gift £12,000 this year if neither of you used the allowance last year.
Similarly, the so-called small gifts exemption allows you to give gifts of £250 to as many individuals as you like during a single tax year (as long as the individual hasn’t also benefited from your £3,000 annual exemption).
The small gifts rule was introduced in 1984. While inflation has increased the cost of living substantially since then, the exemption has remained unchanged, and small gifts are still categorised as those below £250. Had this exemption risen with inflation, it would be worth £670 now, according to the BoE calculator.
Rates of Income Tax have been frozen since 2021
Rishi Sunak introduced several threshold and allowance freezes as part of his 2021 Spring Budget.
Originally intended as a short-term measure in the wake of the coronavirus pandemic, many of the freezes were subsequently extended. These extensions were initially meant to run until 2026, then 2028, and finally, in the case of the main rates of Income Tax, until at least 2030.
The above thresholds have already been frozen for five years, with at least another four to go.
As your salary, inflation-linked pension benefits, and rental income, for example, increase over this time, you will become susceptible to fiscal drag.
Had the above thresholds risen in line with inflation, the table would look like this in May 2026:
Source: BoE inflation calculator
As you can see, frozen thresholds have had a significant impact on the amount you can earn without paying tax or without crossing into a higher band.
That said, the important next step is simply to remain focused on your long-term plan, which is adaptable and robust enough to cope.
Get in touch
At Globe IFA, we can help to ensure your plan remains aligned to your ultimate objectives and that you remain on track to your goals, whatever changes occur to tax bands and thresholds, your investments, or the wider economy. This gives you the peace of mind to enjoy the present, knowing that the future is in hand.
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans in the most tax-efficient way for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
