The Tax Trap: Navigating Inheritance and Income Tax in a Frozen Landscape
June 7, 2025, 5:13 am
Location: United Kingdom, England, London
Employees: 11-50
Founded date: 2017
Total raised: $10.41M
Taxation can feel like a maze. With new rules and frozen thresholds, many find themselves ensnared. The landscape is shifting, and average earners are caught in the crossfire. Inheritance Tax (IHT) and fiscal drag are two beasts that demand attention. Understanding them is crucial for protecting your hard-earned assets.
Inheritance Tax is no longer just a concern for the wealthy. Recent changes mean that even average earners could face hefty liabilities. The government’s decision to include pensions in IHT calculations is a game-changer. This move, set to take effect in April 2027, could pull many into the IHT net.
Consider this: a 45-year-old earning the national average wage of £35,000 could face an IHT bill of nearly £200,000 by age 68. For those earning £50,000 and £80,000, the figures climb even higher. This isn’t just a statistic; it’s a looming reality for many families.
The numbers tell a story. IHT receipts soared to over £8 billion in the last financial year, a rise driven by increasing asset values and frozen thresholds. The nil-rate band, unchanged since 2022, means that more estates will be liable for tax. By 2030, nearly 153,000 estates could face new or increased IHT liabilities. This includes over 31,000 estates that will be newly affected.
The term “double whammy” comes to mind. The combination of pension inclusion and frozen thresholds means IHT is expanding. It’s no longer just a tax for the affluent; it’s creeping into the lives of everyday earners.
So, how can you protect your assets? First, understand your allowances. Everyone has a tax-free allowance of £325,000. If you leave your estate to your spouse, this can double. This is the first line of defense against IHT.
Next, consider gifting. You can give away up to £3,000 each year without incurring tax. If you didn’t use last year’s allowance, you can gift £6,000 this year. Couples can double this amount. This simple strategy can significantly reduce your estate’s value, keeping it below the IHT threshold.
For those with larger potential liabilities, the “gifting out of surplus income” rule is a hidden gem. If you earn £30,000 after tax and spend £20,000, you can gift the remaining £10,000 without tax implications. This approach requires careful record-keeping, but it can drastically lower your IHT bill over time.
Now, let’s shift gears to fiscal drag. This phenomenon is like a slow leak in your wallet. As wages rise, tax thresholds remain stagnant. Millions will find themselves paying more tax without realizing it. By 2029, around 8.3 million people will be affected.
Frozen tax thresholds mean that even modest pay increases can push you into higher tax brackets. If you earn just below the £50,270 higher rate tax band, any raise could mean paying 40% tax. This is a stealth tax, creeping up on unsuspecting earners.
For high earners, the impact is even more pronounced. A £100,000 salary in 2025 will result in an extra £2,445 in taxes each year until 2028. Middle earners will see a smaller increase, but it’s still significant. The freeze on income tax thresholds means that more people will feel the pinch.
So, how can you navigate this tax minefield? Increasing your pension contributions is a smart move. This not only reduces your taxable income but also prepares you for retirement. Topping up your pension through salary sacrifice is a double win. It lowers your taxable income and cuts your National Insurance bill.
Consider a self-invested personal pension (SIPP) or a workplace pension. Just remember the annual allowance of £60,000. Exceeding this limit means facing tax on the excess.
Savings are another avenue to explore. Tax-efficient vehicles like ISAs allow you to grow your money without tax implications. With a £20,000 allowance, any interest or investment growth is tax-free.
The landscape is changing, and so must your strategies. The tax system is a labyrinth, but with the right tools, you can navigate it. Understanding IHT and fiscal drag is essential.
Protecting your assets requires proactive measures. Don’t wait for the taxman to catch up. Take control of your financial future. With careful planning and strategic gifting, you can shield your estate from the tax net.
In this new era of taxation, knowledge is power. Equip yourself with the right information. Consult with financial experts if needed. The stakes are high, but with the right approach, you can emerge unscathed.
In conclusion, the tax landscape is fraught with challenges. Inheritance Tax and fiscal drag are two formidable foes. But with awareness and action, you can safeguard your legacy. Don’t let the tax system dictate your financial fate. Take charge and navigate the maze with confidence.
Inheritance Tax is no longer just a concern for the wealthy. Recent changes mean that even average earners could face hefty liabilities. The government’s decision to include pensions in IHT calculations is a game-changer. This move, set to take effect in April 2027, could pull many into the IHT net.
Consider this: a 45-year-old earning the national average wage of £35,000 could face an IHT bill of nearly £200,000 by age 68. For those earning £50,000 and £80,000, the figures climb even higher. This isn’t just a statistic; it’s a looming reality for many families.
The numbers tell a story. IHT receipts soared to over £8 billion in the last financial year, a rise driven by increasing asset values and frozen thresholds. The nil-rate band, unchanged since 2022, means that more estates will be liable for tax. By 2030, nearly 153,000 estates could face new or increased IHT liabilities. This includes over 31,000 estates that will be newly affected.
The term “double whammy” comes to mind. The combination of pension inclusion and frozen thresholds means IHT is expanding. It’s no longer just a tax for the affluent; it’s creeping into the lives of everyday earners.
So, how can you protect your assets? First, understand your allowances. Everyone has a tax-free allowance of £325,000. If you leave your estate to your spouse, this can double. This is the first line of defense against IHT.
Next, consider gifting. You can give away up to £3,000 each year without incurring tax. If you didn’t use last year’s allowance, you can gift £6,000 this year. Couples can double this amount. This simple strategy can significantly reduce your estate’s value, keeping it below the IHT threshold.
For those with larger potential liabilities, the “gifting out of surplus income” rule is a hidden gem. If you earn £30,000 after tax and spend £20,000, you can gift the remaining £10,000 without tax implications. This approach requires careful record-keeping, but it can drastically lower your IHT bill over time.
Now, let’s shift gears to fiscal drag. This phenomenon is like a slow leak in your wallet. As wages rise, tax thresholds remain stagnant. Millions will find themselves paying more tax without realizing it. By 2029, around 8.3 million people will be affected.
Frozen tax thresholds mean that even modest pay increases can push you into higher tax brackets. If you earn just below the £50,270 higher rate tax band, any raise could mean paying 40% tax. This is a stealth tax, creeping up on unsuspecting earners.
For high earners, the impact is even more pronounced. A £100,000 salary in 2025 will result in an extra £2,445 in taxes each year until 2028. Middle earners will see a smaller increase, but it’s still significant. The freeze on income tax thresholds means that more people will feel the pinch.
So, how can you navigate this tax minefield? Increasing your pension contributions is a smart move. This not only reduces your taxable income but also prepares you for retirement. Topping up your pension through salary sacrifice is a double win. It lowers your taxable income and cuts your National Insurance bill.
Consider a self-invested personal pension (SIPP) or a workplace pension. Just remember the annual allowance of £60,000. Exceeding this limit means facing tax on the excess.
Savings are another avenue to explore. Tax-efficient vehicles like ISAs allow you to grow your money without tax implications. With a £20,000 allowance, any interest or investment growth is tax-free.
The landscape is changing, and so must your strategies. The tax system is a labyrinth, but with the right tools, you can navigate it. Understanding IHT and fiscal drag is essential.
Protecting your assets requires proactive measures. Don’t wait for the taxman to catch up. Take control of your financial future. With careful planning and strategic gifting, you can shield your estate from the tax net.
In this new era of taxation, knowledge is power. Equip yourself with the right information. Consult with financial experts if needed. The stakes are high, but with the right approach, you can emerge unscathed.
In conclusion, the tax landscape is fraught with challenges. Inheritance Tax and fiscal drag are two formidable foes. But with awareness and action, you can safeguard your legacy. Don’t let the tax system dictate your financial fate. Take charge and navigate the maze with confidence.