Stealth tax blow to workers - and how to beat it

Taxpayers face a growing income tax burden as the Office for Budget Responsibility (OBR) predicts inflation will run higher than previous forecast, while the freeze on tax thresholds remains in place, according to new calculations by interactive investor.

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In its latest fiscal and economic outlook, published following the Spring Statement, the OBR has revised its inflation forecast upwards, projecting CPI inflation to average 3.2% in 2025 before falling to the Bank of England’s 2% target in 2027.

The freeze on the personal allowance at £12,570, combined with rising wages, means more people will pay higher taxes in the coming years - an effect known as fiscal drag. This is the ultimate stealth tax, as many taxpayers may not realise they are paying more simply due to inflation.

The freeze on income tax thresholds is currently set to end in April 2028.

New analysis by interactive investor, the UK’s second-largest DIY investment platform, factoring in the latest inflation figures from the OBR following the Spring Statement, shows:

• High earners on a £100,000 salary in 2025 would pay £2,445 extra tax each year by tax year ending April 2028, compared to £2,317 under the previous OBR forecast
• Middle earners on a £35,000 salary in 2025 are set to pay £845 extra tax each year by April 2028, compared to £801 under the previous OBR forecast
• Low earners on a £20,000 salary in 2025 are due to pay £282 extra tax each year by April 2028, compared to £267 under the previous OBR forecast.

These figures assume a 5.8% increase in wages for the upcoming tax year (2025–26), based on the latest ONS data, with wage growth continuing in line with the OBR’s annual inflation forecast until April 2028.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The latest OBR forecast spells further bad news for taxpayers, with higher inflation set to inflate the income tax burden even more. The freeze on income tax thresholds means more people will be dragged into higher tax brackets, while those on lower incomes will see a greater share of their earnings swallowed by tax.”

How to beat fiscal drag through pension contributions

Myron Jobson says: “For those who can afford it, increasing your pension contributions isn’t just good for your retirement - it also lowers your taxable income, helping you stay out of higher tax bands. Higher and additional rate taxpayers can also claim extra tax relief.

“Topping up your pension through salary sacrifice is a double win - it reduces your taxable income, helping you avoid fiscal drag, while also cutting your National Insurance (NI) bill.

“Workers might be able to top up their pension through salary sacrifice, which helps mitigate fiscal drag by reducing taxable income while also lowering NI contributions. With salary sacrifice, instead of receiving part of your salary (and being taxed on it), you agree with your employer to divert that portion straight into your pension. Since your gross salary is lower, both income tax and NI contributions are reduced before you even get paid.

“For high earners, pension contributions can also reduce their adjusted net income, helping them avoid tax cliff edges - such as the punitive 60% effective tax rate that applies to those earning between £100,000 and £125,140, where the personal allowance is gradually withdrawn.

“For parents, this strategy could also help them remain eligible for the government’s Free Childcare and Tax-Free Childcare schemes.

“For those at risk of losing child benefit due to the High Income Child Benefit Charge (£60,000 threshold), pension contributions can reduce their adjusted net income and help keep their benefits intact.”