Inflation is considered to be a hidden form of taxation by many financial experts.  Why is this? Well, it’s because governments can use it to tax you more heavily by stealth. It’s a silent destroyer of individuals’ wealth as well as a destroyer of debt, especially government debt, because debt is reduced in real terms meaning in inflation adjusted terms.


Take the UK as an example. Tax reliefs and allowances were frozen in the 2021/22 tax year through to 2025/26. During this period to date CPI inflation has ranged from 3.2% (March 2024) to 11.1% (October 2022). So the average inflation rate for the last three tax years has been, say, 7% a year. That’s equivalent to 22.5% compounded. What this means is that 22.5% more of your income and capital have become subject to taxation. That is a swinging hidden increase in personal taxes over the last three fiscal years.  A true stealth tax raid on the innocent and unwary citizens of the UK.


However, it doesn’t stop there. Why? Because the inflation rate itself is very misleading and understated.  You see there are three principle inflation measures in the UK.  They are CPI (the government’s preferred measure), RPI and CPIH.  CPI excludes housing costs.  RPI includes mortgage costs.  CPIH includes housing costs. How can housing costs be missing from any measure of inflation when virtually everyone lives somewhere and has housing costs?


CPIH rose by 3.8% in the 12 months ended 31 March 2024. Over the same time period CPIH (excluding energy, food, alcohol and tobacco) rose by 4.7%.  Most notably the owner occupiers’ housing costs (OOH) component of CPIH rose 6.3% over the year to 31 March 2024.  OOH only comprises 16% of CPIH which is far too low.


Inflation is supposed to be based on an average basket of goods and services. However, it fails to measure many important costs of living.  Let’s look at how some specific prices have risen over the year to March 2024.

Alcohol and tobacco 11.9%

Health 6.7%

Communication 7.6%

Recreation and culture 5.6%

Restaurants and hotels 5.9%

All services 6%


Whilst not all of the above costs are necessities it nonetheless begs the question how a CPI inflation rate of just 3.2% can be quoted for CPI inflation over the 12 months to March 2024.  The true rate of inflation is probably closer to twice the official rate of 3.2% at around 6.5% p.a.  This means that your purchasing power from the freezing of tax reliefs and allowances hasn’t reduced by around 22.5% p.a. Over the last three tax years but by 45%.


OK, salaries have increased over the last three years but not by anywhere near 45%. Average earnings have increased by approximately 20% over the same three year time period. So that means an average increase in the cost of living for the average person in the UK of 25% (45%-20%) over the three years to March 2024.  Virtually all of this loss has been caused by the freezing of personal allowances and tax reliefs in the UK. Hence the reason why inflation is considered to be a hidden tax.


So what can you do about it? Well, the only way to counter the stealth tax of inflation is to invest in real assets such as property and shares.  These assets have historically been great hedges against inflation.  Another option is to start a business or invest in one. You may even like to consider investing in collectibles such as gold coins, stamps and signed memorabilia etc.


One thing for sure if you leave your money invested in a bank account you will lose money in real terms (inflation adjusted) after taking into account taxation and inflation.  You know it makes sense.*

Sources:  All data has been sourced from the Office for National Statistics (ONS) website



The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.  

Tony Byrne

Chartered and Certified Financial Planner

Managing Director of Wealth and Tax Management

If you are looking for expert guidance in Financial Planning contact Wealth and Tax Management on 01908 523740 or email wealth@wealthandtax.co.uk