Fiscal Drag 2026: How Frozen Tax Thresholds Are Costing You More
Fiscal Drag 2026: How Frozen Tax Thresholds Are Costing You More
You might not have had a tax rise announced in any Budget. But if your salary has gone up since 2021, you're almost certainly paying more tax than you were — and the mechanism is called fiscal drag.
What Is Fiscal Drag?
Fiscal drag happens when income tax thresholds are frozen while wages (and prices) rise with inflation. Your salary goes up, but the tax-free allowance stays the same, so a greater proportion of your income is taxed.
It's a tax rise the government never has to announce in a Budget speech.
The Numbers Behind the Freeze
The UK personal allowance and higher rate threshold have been frozen since April 2021:
| Threshold | Value (frozen since April 2021) |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate upper limit | £50,270 |
| Additional rate threshold | £125,140 |
Average UK wages have risen roughly 20–25% since April 2021. If the personal allowance had risen with average earnings, it would now be around £15,000–£15,700.
How Much More Are You Paying?
Here's a comparison of what someone earning today's salary would have paid if thresholds had risen with inflation vs what they actually pay:
Example: £35,000 Salary
| Inflation-uprated thresholds | Frozen thresholds (actual) | |
|---|---|---|
| Personal Allowance | ~£15,200 | £12,570 |
| Taxable income | £19,800 | £22,430 |
| Income tax (20%) | £3,960 | £4,486 |
| Extra tax paid | £526/year |
Example: £55,000 Salary (higher rate taxpayer)
If the higher rate threshold had risen with inflation, it would be around £60,000. By staying at £50,270, anyone earning between £50,271 and £60,000 is now paying 40% tax on income that would previously have been taxed at 20%.
For a £55,000 earner:
- Income pulled into higher rate band: ~£4,730
- Extra tax vs inflation-uprated threshold: ~£946/year
How Many People Are Affected?
The OBR estimates the freeze will drag approximately 4 million additional taxpayers into the income tax net and 3 million more into the higher rate band between 2021 and 2028.
By 2026:
- Around 40% of all taxpayers now pay the higher 40% rate — up from 13% in 2010
- The personal allowance has effectively lost £2,400–£3,000 in real value since the freeze began
The 60% Tax Trap Widens
The personal allowance taper — where you lose £1 of allowance for every £2 earned above £100,000 — creates an effective 60% tax rate between £100,000 and £125,140.
With inflation but a frozen band, more people are naturally drifting into this zone without ever getting a "large" pay rise. Anyone earning £100,000–£125,140 effectively pays 60% marginal tax. Strategies to mitigate this include pension contributions to bring gross income below £100,000.
Scotland: A Different Picture
Scotland has partially uprated its lower bands, but higher earners in Scotland face even steeper effective rates. A Scottish taxpayer on £50,000 pays roughly £1,500 more per year than an equivalent English taxpayer due to the 42% higher rate kicking in at £43,662 rather than £50,270.
Use our salary calculator for Scotland to compare.
What Can You Do?
You can't change the thresholds, but you can reduce the income that's subject to them:
Pension contributions
Every £1 of pre-tax pension contribution reduces your taxable income. A higher rate taxpayer contributing £1,000 to their pension only "costs" them £600 in take-home pay, because they save 40% tax on that amount.
Salary sacrifice
If your employer offers salary sacrifice for pension, cycle-to-work, or EV schemes, these reduce gross pay before tax and NI are calculated — double saving.
Personal Savings Allowance
Basic rate taxpayers can earn £1,000 in savings interest tax-free; higher rate taxpayers get £500. ISA contributions don't count towards this — ISA interest is always tax-free.
Check your tax code
Frozen allowances mean any errors in your tax code are now worth more to fix. An incorrect code could be costing you hundreds per year. Check against your P60 or contact HMRC.
The Outlook
The freeze is confirmed through April 2028 at minimum. After that, both major parties have been vague about uprating plans. The realistic outlook is that fiscal drag will continue to quietly push average earners into higher tax territory for several more years.
Use our UK Salary Calculator to see exactly what you're taking home after tax in 2025/26 — and what you'd keep with different pension contribution levels.