Awful April: brace for a wave of stealth tax rises
April is upon us and the new tax year will usher in a range of tax hikes, despite the absence of any headline rate rises, with frozen thresholds, shrinking allowances and tighter reliefs set to hit families, workers and savers.
The harsh impact will also be felt as Brits are hit with a wave of rising household bills, compounding the financial pressure and coming at a time of heightened uncertainty amid the economic impact of the Iran war.
Olly Cheng, financial planning divisional lead at Rathbones, said: “A new tax year usually brings a clean slate, but this one marks a clear step up in so-called stealth taxes.
“Frozen thresholds are quietly pulling more people into higher tax bands, meaning more households will pay more tax, often without realising it.
“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.”
The income tax trap
Since the run up to the 2025 Autumn Budget, the conversation surrounding the income tax trap has gathered speed with families scrambling to sort their finances in a bid to prevent being dragged into a higher tax band.
Income tax rates remained unchanged in last year’s Budget but the threshold freeze will remain until at least 2031, intensifying fiscal drag.
HMRC estimates show that a record 2m people will earn over £100,000 in the incoming tax year, up from 1.9m this year, meaning roughly six per cent of the workforce will start the year in or on the edge of the tax trap.
Crossing the 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, turning bonus and pay rises into a “tax shock”.
Inheritance tax bill
The tax year also begins with frozen inheritance tax (IHT) thresholds, at £325,000 nil rate band and £175,000 residence nil rate band, regardless of any possible rise in property and asset values.
Rathbones estimates that more than 3,500 estates could face IHT bills breaching £500,000 by the end of the current tax year, up from 2,520 estates in the 2021 to 2022 tax year.
Cheng said: “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.
“The issue is set to intensify from April 2027, when pension assets are brought into scope, a change that could pull even relatively modest estates into the IHT net.
“There is added impetus to act sooner rather than later, as many want to support their children and grandchildren facing far greater financial pressures than previous generations, from getting onto the property ladder and paying university fees to coping with broader cost of living challenges.”
Dividend and VCTs
Dividend tax is also set to increase by two percentage points for most investors, tightening the tax net on income held outside tax-free wrappers such as pensions and ISAs.
Basic rate taxpayers will be subject to a jump from 8.75 per cent to 10.75 per cent, while higher rate taxpayers will see an increase from 33.75 per cent to 35.75 per cent.
Additional rate taxpayers will continue to be hit at 39.35 per cent.
The increase also means business owners who pay themselves through dividends should check numbers “more carefully as the tax advantage has been narrowed”.
Meanwhile, VCT tax relief will be slashed 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, said: “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’s wise to check bonuses, pay rises or benefits that could tip total income over the threshold. One option is to see whether any potential salary sacrifice schemes are available to bring taxable income down, though these schemes have also been in the Chancellor’s sights.
Make use of remaining ISA allowances before the reset, particularly on those held outside tax efficient wrappers, including on dividend income.
Savers can also look to reduce their inheritance tax exposure by taking stock of estate values, as rising property prices can push estates closer to inheritance tax thresholds.