Your tax rate has not gone up. Nobody voted on it. There was no headline in the Budget saying “we are raising your income tax.” And yet, millions of UK workers are paying significantly more tax in real terms than they were three years ago — and will continue doing so until at least April 2031. The mechanism is called fiscal drag, and understanding it could save your household hundreds of pounds a year.
What Is Fiscal Drag?
Fiscal drag happens when tax thresholds are held in place while wages and prices rise. Because you are earning more in cash terms — even if that extra pay only keeps pace with inflation — a larger slice of your income falls inside the taxable zone, or tips you from one tax band into the next. The government collects more revenue without ever changing a single tax rate. Critics call it a stealth tax; the Treasury calls it threshold management. Either way, the effect on your pay packet is real.
The key numbers to know are simple: the personal allowance — the amount you can earn before paying any income tax — is £12,570. The higher-rate threshold — where the 40% rate kicks in — is £50,270. Both have been frozen in cash terms since April 2021. Under current plans confirmed at the Autumn Budget 2025, they will stay frozen until April 2031: a decade-long standstill.
How Long Is the Freeze? The Autumn Budget 2025 Extension
When the Conservative government first froze thresholds in the 2021 Spring Budget, the plan was to hold them until 2026. The 2022 Autumn Statement extended that to April 2028. Then, on 26 November 2025, Chancellor Rachel Reeves announced a further three-year extension in her Autumn Budget — pushing the freeze out to April 2031.
The Institute for Fiscal Studies (IFS) described the extension as the single biggest revenue-raiser in the 2025 Budget, forecast to bring in £8 billion extra per year by 2029–30 and £13 billion by 2030–31. That money has to come from somewhere — and it comes from ordinary workers’ pay packets, quietly and automatically, without Parliament ever voting to raise income tax rates.
National Insurance (NI) thresholds follow the same pattern. The primary threshold — where employee NI starts — is also aligned with the personal allowance at £12,570 and is frozen on the same timetable. So the fiscal drag effect applies to both your income tax and your NI bill simultaneously.
The Numbers: Who Gets Pulled In?
The IFS has modelled the full impact of the freeze extended to 2031. Compared with a world in which thresholds had simply risen with inflation since 2021, the cumulative effect is striking:
- 5.1 million more people will be paying income tax by the end of the freeze period than would otherwise have been the case.
- 4.8 million more people will be subject to the higher 40% rate.
- Under current policy, 10.1 million people — roughly one in four employees — will be higher-rate taxpayers by 2029–30. In 2019–20, the higher-rate threshold sat just below the 90th percentile of earnings. By 2029–30 it will sit around the 75th percentile.
- Even part-time minimum wage workers are increasingly being dragged into tax. The IFS estimates that by 2029–30 a minimum-wage worker need only put in 18 hours a week to become an income taxpayer — down from 31 hours in 2015–16.
The practical effect? If you received a pay rise in the last few years — even one that barely kept pace with inflation — you are almost certainly worse off in real after-tax terms than you were in 2021. The threshold did not move; your pay did.
A Real-Life Example: The £52,000 Pay Rise That Hits You Twice
Imagine you were earning £48,000 in 2021 — comfortably a basic-rate taxpayer. Since then your employer has given you a series of cost-of-living increases and you now earn £52,000. You might feel you have had a pay rise. In cash terms you have. But in real terms, after accounting for inflation, you may be no better off — and you are now paying the 40% higher rate on £1,730 of your income (the slice between £50,270 and £52,000). In 2021, every penny of your salary was taxed at 20% or below. Today, part of it is taxed at 40% — simply because the threshold stayed still while your wages moved.
Pensioners: A Ticking Time Bomb
The freeze creates a particularly sharp problem for pensioners, thanks to the triple lock. The full new state pension is currently £11,973 per year — just below the £12,570 personal allowance. But the triple lock means the state pension rises each year by the highest of inflation, earnings growth, or 2.5%. Thresholds are frozen. The pension keeps rising.
The IFS calculates that the full new state pension will exceed the personal allowance in 2027–28. At that point, pensioners who receive only the state pension and have no other taxable income will, for the first time, owe income tax directly to HMRC. Millions of people on modest, fixed incomes will be pulled into self-assessment or face unexpected tax deductions. If you have elderly relatives relying on the state pension alone, this is worth flagging now so they are not caught off guard.
The 60% Tax Trap: When Earning More Costs a Fortune
There is one corner of the UK tax system where fiscal drag intersects with an even sharper problem. If your income rises above £100,000, you begin to lose your personal allowance — by £1 for every £2 earned over that threshold. By the time you reach £125,140, your personal allowance has been wiped out entirely.
The result is an effective marginal tax rate of 60% on every pound earned between £100,000 and £125,140. You pay 40% income tax on that extra income, plus you lose 40p of your personal allowance — which means another 20p of income (previously sheltered) becomes taxable at 40%. Add 2% employee NI and the true marginal cost can approach 62%. You keep less than 40p of every additional pound you earn in that band.
HMRC estimates that 2.06 million taxpayers will lose some or all of their personal allowance in 2026–27, up from 1.95 million in 2025–26. As wage growth continues and the threshold stays fixed at £100,000, more and more professionals — senior teachers, experienced NHS consultants, successful small business owners — are drifting into this band without any increase in their real living standards.
Fiscal Drag at a Glance: Key Thresholds Compared
| Threshold | 2021 level | 2026/27 level | Where it would be if inflation-linked* |
|---|---|---|---|
| Personal allowance | £12,570 | £12,570 (frozen) | ~£15,200 |
| Higher-rate threshold | £50,270 | £50,270 (frozen) | ~£60,700 |
| Personal allowance taper starts | £100,000 | £100,000 (frozen) | ~£121,000 |
| Personal allowance fully withdrawn | £125,140 | £125,140 (frozen) | ~£151,000 |
| NI primary threshold | £9,568 | £12,570 (frozen since 2022) | ~£15,200 |
How to Soften the Blow: Legitimate Strategies
You cannot change the law, but you can manage your income intelligently within it. Here are the most effective tools available to UK taxpayers right now.
1. Pension Contributions
Contributing to a pension is the most powerful single lever available to most people. Contributions reduce your adjusted net income — the figure HMRC uses to assess which tax band you fall into. If you are hovering just above the £50,270 higher-rate threshold, a pension contribution of a few hundred pounds a month could pull you back into the basic-rate band, saving you 20p of tax on every pound contributed. If your income sits between £100,000 and £125,140, pension contributions restore your personal allowance at the rate of £1 for every £2 contributed — making the effective relief on those contributions worth up to 60%.
2. Salary Sacrifice
If your employer offers a salary sacrifice arrangement — swapping part of your gross salary for employer pension contributions, childcare vouchers, or cycle-to-work benefits — you reduce your taxable income before either income tax or National Insurance is calculated. This is particularly effective for NI savings, as you avoid employee NI (currently 8% on earnings between the primary threshold and upper earnings limit) on the sacrificed portion. Check with your HR or payroll department whether your employer offers this. See also our guide to understanding how your income is taxed for more context on how different income sources interact.
3. ISAs
Income earned inside an ISA — interest, dividends, and capital gains — does not count towards your adjusted net income and is completely invisible to the personal allowance taper. If you have savings generating interest, sheltering them inside a cash ISA (annual allowance: £20,000) removes that income from the HMRC calculation entirely. For savers approaching the £100,000 threshold, this can be the difference between keeping your full personal allowance or losing it. See our full guide on the personal savings allowance in 2026 for how interest income is taxed outside an ISA.
4. Marriage Allowance and Spousal Planning
If one partner earns below the personal allowance (£12,570) and the other is a basic-rate taxpayer, the lower earner can transfer 10% of their personal allowance — up to £1,260 — to the higher earner, saving up to £252 per year in income tax. This is the Marriage Allowance, and it is free, simple to claim via HMRC online, and can be backdated up to four years. You can find a full walkthrough in our dedicated guide: Marriage Allowance UK 2026.
More broadly, where a couple have unequal incomes and hold savings or investments jointly, shifting income-generating assets to the lower earner can reduce the household’s overall tax bill — keeping more income below the personal allowance and away from higher-rate bands. Get independent financial or tax advice before restructuring significant assets.
5. Gift Aid
If you give to charity using Gift Aid, those donations also reduce your adjusted net income in the same way as pension contributions. For a higher-rate taxpayer donating £100 via Gift Aid, the charity reclaims £25 from HMRC, and you can reclaim a further £25 through your tax return — effectively cutting the net cost to you to £75 and reducing your taxable income. If your income sits close to the £50,270 threshold or the £100,000 taper point, this is worth factoring into your giving.
Frequently Asked Questions
When will the personal allowance and higher-rate threshold be unfrozen?
Under the plans confirmed in the Autumn Budget 2025, both the personal allowance (£12,570) and the higher-rate threshold (£50,270) will remain frozen until 6 April 2031. The government has said thresholds will be uprated in line with inflation after that point, but no guarantee is fixed in law beyond 2031. Future Budgets could change the picture in either direction.
Does fiscal drag affect National Insurance as well as income tax?
Yes. The primary NI threshold — where employee contributions begin — is aligned with the personal allowance at £12,570 and is frozen on the same timetable. Similarly, the upper earnings limit (above which NI drops to 2%) is aligned with the higher-rate threshold at £50,270 and is also frozen. This means that as wages rise, a greater proportion falls into the 8% NI band — a double fiscal-drag effect on both income tax and NI simultaneously.
Why do I pay a 60% effective tax rate between £100,000 and £125,140?
Within this income range, HMRC withdraws £1 of your personal allowance for every £2 you earn above £100,000. That withdrawn allowance (previously sheltered from tax) now becomes taxable at 40%. So for every £2 of extra income: you pay 80p (40%) income tax on the new income directly, plus you lose £1 of personal allowance, which itself is taxed at 40% — costing you another 40p. Total: £1.20 of tax on £2 of income, or an effective marginal rate of 60%. Add 2% employee NI and the real cost is even higher.
Will pensioners really have to pay income tax on the state pension?
Based on current IFS projections, yes — by 2027–28. The full new state pension is currently £11,973 per year. Under the triple lock it rises annually by the highest of inflation, earnings growth, or 2.5%. With the personal allowance frozen at £12,570, the state pension is projected to exceed the personal allowance within two years. Pensioners whose income consists solely of the state pension would then owe income tax to HMRC — a new and unwelcome administrative burden for people on modest, fixed incomes.
Can pension contributions genuinely wipe out the 60% tax trap?
They can reduce or eliminate it. Every pound of pension contribution reduces your adjusted net income for the purposes of the personal allowance taper. For example, if you earn £110,000, a £10,000 pension contribution (via your personal tax return or salary sacrifice) reduces your adjusted net income to £100,000 — restoring your full personal allowance and avoiding the 60% band entirely. The effective tax relief on contributions made within the taper zone is therefore 60%, making pension saving exceptionally valuable for this group. A regulated financial adviser can help you model the exact figures for your situation.
Take control of your tax position
Fiscal drag is real, but it is not inevitable that you pay the maximum. Whether it is topping up your pension, using your ISA allowance, or claiming Marriage Allowance, GetSmartSaver has the plain-English guides to help you keep more of what you earn.
Explore GetSmartSaver guidesThis article is for general information only and does not constitute financial or tax advice. Figures and thresholds are as of June 2026. Tax rules are subject to change. Always check the latest figures on gov.uk or HMRC and seek regulated financial advice for your personal circumstances.