It’s the tax rise you never saw coming—because it was never officially announced. Nearly 18 million more Britons, including a record number of pensioners, are expected to fall into the income tax system by 2027. How? Through a stealth tax method that exploits frozen income tax thresholds, quietly increasing the nation’s tax burden without changing a single rate.
Unlike traditional tax hikes, which are highly publicized and often debated in Parliament, stealth taxes happen behind the scenes. The culprit in this case is the long-term freeze on income tax bands. As wages and pensions rise with inflation, people are being pushed into higher tax brackets even though their real spending power hasn’t increased. This sneaky trick, known as “fiscal drag,” is set to rake in billions for the Treasury—at the public’s expense.
Even if Labour sticks to its promise not to extend the freeze past 2027, the damage is already set in motion. Let’s break down how this stealth raid works, who it hits hardest, and what you can do to minimize its impact on your finances.
What Is a Stealth Tax and How Does It Work?
The term “stealth tax” might sound like something out of a spy novel, but it’s a very real financial phenomenon. Unlike explicit tax hikes, stealth taxes are not immediately visible. They sneak into your budget gradually and are usually caused by government inaction—specifically, the decision to keep tax thresholds or allowances unchanged while inflation and earnings increase.
In simple terms, if the threshold for paying tax stays the same, but your income goes up with inflation or cost-of-living adjustments, you end up paying more tax—even if your financial situation hasn’t genuinely improved. That’s the magic (or menace) of fiscal drag.
So let’s say you earn £12,570, which is the current personal allowance for income tax. You’re not taxed. But what if your income increases by 5% due to inflation? Now you earn £13,198—still the same value in “real” terms—but suddenly, part of your income becomes taxable. You’re being taxed more, even though you’re not richer in any meaningful way.
This tactic allows governments to increase tax revenues without ever announcing a new tax hike. It’s politically convenient but financially punishing, especially for pensioners and low-to-middle income earners.
The Role of Income Tax Threshold Freezes
The roots of this particular stealth tax go back to Chancellor Rishi Sunak’s 2021 Budget. Facing the financial fallout of the COVID-19 pandemic, he froze personal allowances and tax thresholds until 2026. The freeze was extended again, this time until 2027/28.
Currently, the income tax thresholds are:
- Personal allowance: £12,570
- Higher rate threshold: £50,270
- Additional rate threshold: £125,140
These bands haven’t budged in years. Meanwhile, wages and state pensions have continued to rise—thanks in part to inflation and government-mandated increases like the “triple lock” on pensions. This means more and more people are crossing these static thresholds and paying more tax.
According to forecasts, this policy will pull 18 million more people into the tax system by 2027:
- 8.2 million pensioners will now pay income tax
- 12 million people will fall into the higher-rate bracket
- 2 million will land in the additional rate bracket
And all of this is happening without any change to tax rates. It’s not that people are getting richer—it’s that the tax system isn’t adjusting to economic reality.
Projected Impact by 2027
Let’s talk numbers—because they paint a sobering picture. According to economic analysts and financial think tanks, this stealth tax policy will increase the number of UK taxpayers significantly:
- Total taxpayers will jump from around 32 million to 50 million
- Income tax receipts are expected to rise by over £40 billion annually
- Middle-income earners will shoulder a larger share of the tax burden than ever before
But what does this mean in real terms?
Imagine a public sector worker earning £35,000 today. If their salary rises to £40,000 by 2027 due to inflation, they still won’t feel “wealthier.” Yet they’ll pay hundreds more in income tax due to the frozen thresholds. And for higher earners, the leap into the 40% and 45% brackets could be even more punishing.
The situation is just as alarming for pensioners. The government’s own “triple lock” policy is ensuring that state pensions increase with inflation or wage growth—whichever is higher. As a result, pensioners who previously lived tax-free on modest incomes will find themselves dragged into the tax net, despite no change in lifestyle or wealth.
Why Pensioners Are Hit the Hardest
One of the most controversial aspects of this stealth tax is its disproportionate impact on pensioners. These are individuals who’ve paid into the system their whole lives and often live on fixed incomes. They’re not receiving pay raises or bonuses. Yet because the state pension is rising in line with the triple lock—expected to hit around £11,500 annually by 2025—they are inching ever closer to the personal allowance limit of £12,570.
By 2027, it’s estimated that 8.2 million pensioners will be paying income tax—many for the first time in decades. That’s a staggering increase, considering most of them are not seeing any dramatic change in their living standards.
For pensioners relying on private pensions, savings interest, or annuities, the impact is compounded. The combination of higher state pensions and modest supplementary income will push them into taxable territory without any consideration for the cost of living or their actual purchasing power.
Critics argue this amounts to a breach of trust. After all, the triple lock was designed to protect pensioners from poverty, not to make them newly taxable. The government’s failure to raise the personal allowance in tandem with the state pension has effectively weaponized a policy intended to help retirees.
