The Freeze That Keeps on Taking

5 min read

The Budget on 26 November raised £26 billion in new taxes. Most of it will not show up as a headline rate rise. It will arrive quietly, year after year, through allowances that do not move while prices and wages do. The official forecasters now expect the tax take to reach 38.3% of national income by 2030-31, an all-time high. The freeze on allowances is the biggest single measure. It keeps on taking.

What was announced

Income tax thresholds were already frozen until April 2028. The Chancellor has extended that freeze by three more years, to April 2031. The personal allowance stays at £12,570. The higher rate threshold stays at £50,270. By 2031 both will have been fixed for ten years.

Other changes follow the same pattern. Tax on dividends rises by two percentage points from April 2026. Tax on savings income and property income rises by two points from April 2027. From the same date the amount savers under 65 can hold in a cash ISA each year falls from £20,000 to £12,000.

How fiscal drag works

Fiscal drag is the tax rise no one votes for. When thresholds stay still and incomes rise with inflation, more of each pound is taxed. Someone whose pension or salary simply keeps pace with prices ends up paying more, even though their real income has not grown at all.

A simple example shows how it builds. Take a retired person with an income of £20,000 a year from pensions. With a personal allowance of £12,570, the first £12,570 is tax free and the remaining £7,430 is taxed at 20%. That comes to £1,486 a year.

Now suppose that income rises by 4% to £20,800, just enough to keep pace with prices. The allowance has not moved, so £8,230 is now taxed. The bill rises to £1,646. Income went up by 4%. Tax went up by almost 11%. Repeat that each year until 2031 and the gap widens every time, which is why a freeze raises so much money without any headline change.

The Office for Budget Responsibility estimates the three-year extension will raise £8.0 billion in 2029-30 alone. It expects around 780,000 more people to pay basic rate tax and 920,000 more to pay higher rate tax as a result. Since the freeze began in 2021, millions of people have been drawn into income tax for the first time. Pensioners are not exempt. The full new State Pension is due to rise to around £12,548 next April, within touching distance of a personal allowance that will not move until 2031.

The same arithmetic works at the higher rate threshold. Income above £50,270 is taxed at the higher rate. As wages and pensions rise while that line stays fixed, more people who never thought of themselves as well off find part of their income taxed at the higher rate.

Inflation is the engine

Fiscal drag only works because prices keep rising. Consumer prices rose 3.6% in the year to October, still well above the 2% target. The Bank of England held Bank Rate at 4% in early November, on a vote of five to four. A split that close shows how finely balanced the decision was, with almost half the committee ready to cut even with inflation well above target.

This is the link between the Budget and the monetary system. A government with debt close to the size of the whole economy benefits from inflation twice. It shrinks the real value of what it owes. It also pulls more income into tax without a single rate being raised. The saver pays on both counts.

The pressure on the government to find money is real. In March the Institute for Fiscal Studies pointed out that debt interest was set to reach £111 billion in 2025-26, some £64 billion more than had been forecast three years earlier. Money spent on interest cannot be spent on anything else. Raising money quietly through frozen thresholds is politically easier than raising a headline rate, which helps explain why the freeze keeps being extended.

The one thing the Budget left alone

We wrote in November last year about the rise in Capital Gains Tax rates to 18% and 24%. We also wrote about the coins those rises could not touch. A year on, that position is unchanged. The annual Capital Gains Tax allowance remains £3,000, small enough that many ordinary gains on shares or second properties now fall into tax.

UK legal tender gold coins such as the Britannia and the Sovereign sit outside that system. Gains on them are exempt from Capital Gains Tax for UK residents, because they are legal tender. Nothing in this Budget changed that.

That matters more as other routes narrow. Cash savings face higher tax on interest. Dividends face higher tax. The cash ISA allowance is shrinking for most savers. Each change pushes careful savers to think about where their wealth is held and how it is taxed.

Consider a saver under 65 who has been putting £20,000 a year into a cash ISA. From April 2027 only £12,000 of that can go into a cash ISA. The other £8,000 will sit in an ordinary account, where interest above any tax-free allowance is taxed. From the same month that tax will be two points higher than today. The saver has done nothing differently, yet more of their interest is exposed to tax.

It is worth being clear about what the exemption does and does not mean. It does not mean gold cannot fall in value. It means that if a UK resident sells qualifying coins for more than they paid, there is no Capital Gains Tax to pay on the gain. With the allowance for other assets now only £3,000, that difference can be significant over many years.

Gold and the frozen pound

Gold has risen by more than half this year and set a string of new record highs along the way. That is not because gold has changed. It is because the money it is priced in keeps losing ground.

Central banks understand this better than anyone. The World Gold Council reports that they bought 220 tonnes of gold between July and September alone. They are not buying for a quick profit. They are buying an asset that no other government controls.

That buying is part of a longer trend. In 2024 central banks bought more than 1,000 tonnes for the third year in a row, according to the World Gold Council. Private buyers have been active too. Worldwide demand for gold bars and coins came to 1,186 tonnes in 2024 and rose a further 11% on a year earlier in the second quarter of 2025.

A frozen allowance and a falling currency are two sides of the same policy. Governments that have borrowed heavily need inflation to do some of the work. Gold is money they cannot print or freeze. Held as UK legal tender coins, its gains are exempt from Capital Gains Tax for UK residents.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.