Frozen tax thresholds, quietly take more of your income!
You receive a pay rise, but the extra money in your bank account feels disappointing. Meanwhile, your shopping, energy bills and other everyday costs keep climbing.
One reason could be the dreaded fiscal drag, the gradual increase in your tax burden when your income rises but tax allowances and thresholds stay frozen.
It means the government can collect more income tax without increasing the headline tax rates. Here is how it works and why it matters.
What are frozen tax thresholds?
Tax thresholds where first frozen back in the spring budget of 2021 and this was meant to stop in April 2026. This has now been extended twice, and not expected to end until April 2031, that will be nearly 10 years of covertly taking more from you.
Tax thresholds determine when you start paying income tax and when higher rates apply.
For the 2026/27 tax year, someone receiving the standard Personal Allowance in England, Wales or Northern Ireland will generally pay:
Portion of annual income | Income tax rate |
Up to £12,570 | 0% |
£12,571 to £50,270 | 20% |
£50,271 to £125,140 | 40% |
Above £125,140 | 45% |
Your Personal Allowance reduces once adjusted net income exceeds £100,000 and disappears entirely at £125,140. Scotland has different bands and rates for employment, pension and most other non-savings income.
The standard Personal Allowance and the higher-rate threshold shown above are frozen until 5 April 2031. In other words, they do not increase each year to reflect rising prices.
Beyond the frozen personal allowances, the high-income child benefit charge threshold has remained at £60,000 since 2024 and the adjusted net income figure for calculating eligibility for free childcare for working families has stayed at £100,000 since 2017!
These frozen tax thresholds, quietly take more of your income!
What is fiscal drag?
Imagine your salary increases by 5% to help you keep pace with rising living costs.
If tax allowances and thresholds also increased by 5%, the proportion of your salary paid in income tax could remain the same.
When thresholds stay frozen, however, more of your income becomes taxable. Some of it may also move into a higher tax band.
You can end up paying a larger share of your income in tax without becoming better off in real terms. This effect is known as fiscal drag, and it explains why frozen thresholds are often described as a “stealth tax”.
A worked example: a £2,500 pay rise
Consider Alex, who lives in England and earns £50,000 a year. Alex receives a 5% pay rise, taking their salary to £52,500.
Using the 2026/27 income tax rules:
Before the pay rise | After the pay rise | |
Annual salary | £50,000 | £52,500 |
Income tax | £7,486 | £8,432 |
Income after income tax | £42,514 | £44,068 |
Alex’s salary has increased by £2,500, but their income tax bill has increased by £946. They keep £1,554 of the rise before National Insurance and other deductions.
The entire £946 increase is not caused by frozen thresholds: earning more would normally mean paying more tax anyway.
To isolate the effect, suppose both the Personal Allowance and higher-rate threshold had risen by the same 5%. Alex’s income tax bill would instead be £7,860.30.
The frozen thresholds therefore cost Alex an extra £571.70 a year in income tax in this illustration—around £47.64 a month.
If Alex’s living costs also rose by 5%, their income after income tax would fail to keep pace.
This example assumes a standard Personal Allowance, employment income only, and no pension deductions or other reliefs. It excludes National Insurance, student loans and other payroll deductions. The 5% threshold increase is illustrative.
Does entering a higher band mean all your income is taxed at 40%?
No. This is a common misunderstanding.
In Alex’s example, only the £2,230 above £50,270 is taxed at 40%. The income within the basic-rate band remains taxed at 20%.
Crossing the threshold does not mean losing 40% of your entire salary.
Who feels the impact?
Fiscal drag affects more than employees approaching the higher-rate threshold.
People on lower incomes can find that rising earnings take them above the tax-free allowance. Pensioners with increasing taxable pension income can also pay more tax as their income rises.
Higher earners face another pressure point: once adjusted net income exceeds £100,000, the gradual withdrawal of the Personal Allowance can produce an effective income tax rate of 60% on the affected slice of income in England, Wales and Northern Ireland. This arises from the combination of 40% tax and the loss of tax-free allowance.
What can you do?
Start by reviewing your total income, particularly if a pay rise, bonus or pension increase takes you close to a threshold.
Make sure that you are claiming the allowances and reliefs available to you. Pension contributions may reduce adjusted net income and attract tax relief, depending on your circumstances and contribution limits. Eligible Gift Aid donations can also affect the calculation. All this needs to be considered carefully and professional tax advice should be used to avoid costly mistakes.
