How Stealth Taxes Are Quietly Eroding Your Wealth and What You Can Do About It

With frozen tax thresholds and shrinking allowances, more UK households than ever are paying significantly more in tax often without realising how much it’s costing them in the long run.

At Cleveden Park Wealth, we believe proactive planning is the best defence. If you're self-employed, a high earner, or simply trying to make smart use of your savings and investments, it's time to take a closer look at how fiscal drag might be holding you back and what steps you can take to stay ahead.

The Quiet Cost of Fiscal Drag

Since the government froze income tax thresholds, millions of people have been pulled into higher tax bands, not because they’re earning dramatically more, but because inflation has nudged up salaries and savings returns. This is known as fiscal drag.

• An estimated 6 million more people are now paying income tax.

• 3 million more have entered higher or additional-rate bands.

• The Treasury is forecast to take in an additional £89 billion in income tax this year compared to 2021/22.

The result? More of your earnings and your investment returns are being taxed at higher rates than before.

It’s Not Just Your Salary, It’s Your Savings and Investments Too

This tax creep doesn’t stop at your payslip. It’s also hitting the interest on your savings and the dividends on your investments.

• Dividend tax rates increased in 2022.

• The dividend allowance was slashed from £2,000 in 2022 to just £500 in 2024.

• The personal savings allowance of £1,000 for basic-rate taxpayers halves to £500 for higher-rate earners and vanishes entirely for additional-rate taxpayers.

• As a result, £6 billion in tax is now expected to be collected on savings interest alone this year up from just £1.4 billion in 2021/22.

  
  

That’s a significant blow for anyone who relies on investment income or savings interest as part of their financial plan.

Five Ways to Reduce Tax and Protect Your Wealth

While fiscal drag may be unavoidable, there are still tax-efficient strategies available. Here's how we help our clients make the most of them:

1. Make the Most of Your ISA Allowance

Each year you can shelter up to £20,000 from income tax and capital gains tax in an ISA - whether in cash or investments.

• A Stocks & Shares ISA allows tax-free income (including dividends) and growth.

• A Cash ISA shelters your interest from tax, which is particularly valuable as savings rates have risen.

• If you're aged 18–39 and saving for a first home, a Lifetime ISA offers a 25% government bonus on contributions up to £4,000/year.

• For children, a Junior ISA allows up to £9,000/year tax-free.

2. Boost Long-Term Savings with a Pension

Pension contributions remain one of the most tax-efficient ways to grow your wealth:

• Up to £60,000 can be contributed annually (or 100% of earnings if lower), with tax relief at your highest marginal rate.

• The first 25% of your pension can be withdrawn tax-free in retirement.

• Even non-earners can contribute up to £3,600/year and receive tax relief - ideal for spouses or children.

A well-structured pension plan can reduce your income tax liability now while building a solid foundation for the future.

3. Use Salary Sacrifice to Cut Tax and NI

Salary sacrifice arrangements allow you to give up part of your salary in exchange for non-cash benefits like:

• Pension contributions

• Childcare vouchers

• Cycle-to-work schemes

These reduce both income tax and National Insurance, and if your employer contributes their NI savings too, the benefits can be even greater.

4. Share Assets Between Spouses

Assets can be transferred between married couples or civil partners without triggering a tax bill. This allows:

• More effective use of ISA allowances

• Better distribution of income between tax bands

• Lower overall household tax on dividends or rental income

This is especially helpful if one partner is a higher-rate taxpayer and the other pays basic or no tax.

5. Take Advantage of the Marriage Allowance

If one partner earns less than the personal allowance (£12,570), they can transfer £1,260 of it to a basic-rate taxpayer spouse.

• This could save up to £252 a year and you can backdate the claim for up to four years, unlocking over £1,000 in tax savings.

Final Thoughts from Cleveden Park Wealth

Stealth taxes like fiscal drag often go unnoticed but their impact on your income, savings, and investments is very real.

At Cleveden Park Wealth, we help clients stay ahead of these changes with ongoing tax reviews, personalised financial planning, and smart use of available allowances. If you’re unsure whether you’re doing enough to protect your finances, now is the time to act.

Get in touch with our team to discuss your tax strategy and start making your money work smarter.