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Higher inflation: The stealth tax hitting us all

ended 21. August 2025

With inflation jumping to 3.8% in July, many people will focus on what it means for interest rates. But the hidden sting in the tail is how higher inflation quietly drives up the Government’s tax take through fiscal drag.

With tax allowances frozen until 2028, higher wages driven by inflation are pulling more people into paying more tax — often without even realising it. It’s a stealth tax rise on millions of workers, costing households thousands over the coming years.

We want to hear from IFAs, accountants, business owners and tax experts:

Are you seeing more clients caught by frozen allowances and higher tax bills?

How much of a concern is fiscal drag for middle-income families and retirees?

Should the Chancellor be more transparent about the impact of fiscal drag?

 

6 responses from the Newspage community

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Scott Gallacher
Director at Rowley Turton
Higher inflation isn’t just hitting households at the shops — it’s a stealth tax rise. With frozen allowances, every inflation-linked pay rise just pushes people into higher tax, leaving them worse off in real terms.

It’s not just income tax either. Capital Gains Tax allowances were slashed from over £12,000 to just £3,000 — so an average buy-to-let landlord can face a bigger bill purely from inflation. And on inheritance tax, the nil rate bands remain frozen at £1m for a married couple with children. With pensions soon to be dragged into IHT, many people who are currently comfortably safe from IHT today could easily find their family with a significant liability by the end of this Parliament — driven by inflation alone.

The bottom line is that, thanks to higher inflation and fiscal drag, we’re all getting poorer faster.
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Riz Malik
Independent Financial Adviser at R3 Wealth
I’m yet to be convinced that the Chancellor knows what fiscal drag is let alone the implications of it.
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Samuel Mather-Holgate
Managing Director & IFA at Mather and Murray Financial
More economic data and another bad news event for the chancellor. Slowing growth and rising inflation is the worst of both worlds and this inflation print is dangerous as next years benefit and pension increases are assessment in the summer. All in all it means less money for the chancellor and she already had none. Tax increases and state pension changes are fast coming down the track!
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Philly Ponniah
Chartered Wealth Manager and Financial Coach at Philly Financial
Fiscal drag is the tax rise no one votes for. With allowances frozen until 2028, wage growth that should feel like progress is instead pushing ordinary earners into higher tax bands. I’m seeing more clients frustrated at how quickly their tax bill climbs even when take-home pay barely moves. And the £100k tax trap is now catching more families than ever, losing childcare funded hours and facing an effective 60% marginal rate feels like a punishment for earning more. Retirees aren’t immune either, with personal savings thresholds eating into their income. At the very least, the Chancellor should be upfront that this is a deliberate stealth tax, not an accident of the system.
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Rob Mansfield
Independent Financial Advisor at Rootes Wealth Management
Fiscal drag is a cynical way of raising taxes whilst claiming that taxes aren't going up. Inflation means that costs generally go up each year and so wages tend to go up to compensate. Freezing allowances and inflation means you get squeezed at both ends, income and cost of living. The allowance for inheritance tax has been £325,000 since April 2009. If it had increased in line with inflation, it would be around £520,000 today. That's a potential tax bill of £78,000 purely down to this political wheeze.
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Editor
Tony Redondo
Founder at Cosmos Currency Exchange
Fiscal drag represents one of the UK's most significant yet hidden tax policies. The OBR projects frozen thresholds will generate £38bn annually by 2029-30, with key rates unchanged since 2022. As wages rise with inflation, but tax bands stay static, workers are pulled into higher brackets without legislative change. After years of 6% wage growth against frozen thresholds, middle earners, pension savers, and parents face the biggest hit. Unlike explicit rate rises, fiscal drag operates invisibly - most only notice when payslips change. This stealth approach is politically convenient but democratically questionable. While the Chancellor should be transparent about the fiscal drag's impact, don't expect Reeves to volunteer this uncomfortable truth.