For state‐of‐the‐art angular sensors based on the anisotropic magnetoresistive (AMR) effect in NiFe layers, the angular accuracy over time is limited by a drift of the offset voltage of the Wheatstone bridge configuration. It is shown that the interaction of the passivation layer and the magnetic permalloy is crucial for the drift of the offset voltage. By investigating the time and temperature dependence, the offset drift is attributed to stress relief of the PECVD passivation layer due to microstructural changes. Hydrogen outdiffusion from the passivation layer is involved in the observed stress evolution. It is demonstrated that optimising the passivation layer composition as well as the time of the subsequent annealing is beneficial for stress stabilisation of the permalloy‐passivation layer system. With this optimised passivation layer a significant offset drift reduction of the NiFe Wheatstone bridge has been achieved resulting in highly accurate and long‐term stable angular AMR sensors. (© 2010 WILEY‐VCH Verlag GmbH & Co. KGaA, Weinheim)