Since April 2021, the UK’s income tax thresholds have been frozen in place. At first glance this sounds neutral — the tax rates haven’t changed, so why should it matter? The answer is fiscal drag: as wages and prices rise with inflation, frozen thresholds mean more and more of your income falls into higher tax bands. The government collects more tax without ever raising the headline rate.
What Are the Frozen Thresholds?
For 2025-26, the income tax thresholds in England, Wales, and Northern Ireland are:
| Threshold | Amount | Frozen since |
|---|---|---|
| Personal allowance | £12,570 | 2021-22 |
| Basic rate band upper limit | £50,270 | 2021-22 |
| Additional rate threshold | £125,140 | 2023-24 |
In Scotland, income tax rates and bands are set by the Scottish Parliament and differ from the rest of the UK.
The freeze is scheduled to last until April 2028 — meaning thresholds will have been static for seven years.
How Fiscal Drag Works
Imagine the personal allowance had risen in line with the Consumer Price Index (CPI) each year since 2021. By 2025-26, it would be roughly £15,000 rather than £12,570. Instead, it remains at £12,570, so you start paying 20% tax on earnings above that lower figure.
The same logic applies at the higher rate. The £50,270 threshold would be around £60,000 in today’s money if it had tracked inflation. A worker who earned £45,000 in 2021 and received average pay rises since then now earns around £53,000 — crossing the higher rate band despite being no wealthier in real terms.
This phenomenon — people moving into higher tax bands purely due to wage growth rather than genuine increases in real income — is called fiscal drag or sometimes the “stealth tax”.
A Worked Example
Consider someone who earned £48,000 in 2021-22 and has had annual pay rises of around 5% to keep pace with inflation:
| Tax Year | Salary | In higher rate band? | Extra 40% tax vs basic rate |
|---|---|---|---|
| 2021-22 | £48,000 | No (below £50,270) | £0 |
| 2022-23 | £50,400 | Yes (£130 over threshold) | £26 |
| 2023-24 | £52,920 | Yes (£2,650 over threshold) | £530 |
| 2024-25 | £55,566 | Yes (£5,296 over threshold) | £1,059 |
| 2025-26 | £58,344 | Yes (£8,074 over threshold) | £1,615 |
By 2025-26, this person is paying approximately £1,615 more in income tax because they have crossed the higher rate threshold — not because they chose a higher-paying job or received a real pay rise, but simply because wages moved while thresholds did not.
The total extra income tax paid over this five-year period compared to what they would have paid if thresholds had been indexed to inflation is significant.
Who Is Most Affected?
Workers Approaching the Higher Rate Threshold
Anyone with earnings between roughly £45,000 and £60,000 is most likely to have been dragged across the 40% threshold during the freeze period. In 2021, only workers earning above £50,270 paid higher rate tax. By 2028, millions more will be in this position.
Higher Earners Approaching the Personal Allowance Taper
For those earning between £100,000 and £125,140, there is an additional sting. The personal allowance is gradually withdrawn at a rate of £1 for every £2 earned above £100,000. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140. The upper limit of this “60% trap” was increased to £125,140 in 2023-24 and has remained there.
Pensioners on the State Pension
The full new state pension in 2025-26 is around £11,502 per year. With the personal allowance frozen at £12,570, the gap between the two has been narrowing. If the state pension continues to rise under the triple lock while the personal allowance remains frozen, some pensioners may eventually start paying income tax on their state pension alone.
Scottish Taxpayers
While this article focuses on UK-wide thresholds, Scottish taxpayers have different rates and bands set by Holyrood. Scotland has its own starter rate, basic rate, intermediate rate, and higher rate thresholds, some of which have also been frozen or adjusted differently.
The Scale of the Freeze
According to estimates from bodies like the Office for Budget Responsibility and the Resolution Foundation, the threshold freeze is one of the largest tax increases in recent UK history. Millions of taxpayers who were basic rate payers in 2021 have been pulled into the higher rate band, and additional rate taxpayer numbers have grown substantially.
By the time the freeze ends in 2028, the government will have collected tens of billions of pounds in additional revenue that would not have arisen if thresholds had been indexed to inflation.
What Can You Do About It?
The threshold freeze is a structural change to the tax system, but there are legal strategies to reduce its impact:
1. Pension Contributions
Making pension contributions reduces your adjusted net income. A worker on £55,000 who contributes £4,730 to a pension will bring their taxable income below the £50,270 higher rate threshold, saving up to 40% tax relief on those contributions. Both personal pension contributions and salary sacrifice arrangements work for this purpose.
2. ISA Contributions
While ISA contributions don’t reduce your taxable income, they shelter future income and gains from tax. If you’re investing or saving, using your £20,000 ISA allowance first means the returns won’t compound your tax problem in future years.
3. Salary Sacrifice Arrangements
Beyond pensions, salary sacrifice can include childcare vouchers (through legacy schemes) and cycle-to-work arrangements. Each reduces your gross pay and therefore your National Insurance and income tax liabilities.
4. Gift Aid Charitable Donations
If you make donations to charity through Gift Aid, higher and additional rate taxpayers can claim the difference between the basic rate and their marginal rate as a tax refund. This effectively extends your basic rate band.
5. Transfer Income-Producing Assets
Married couples and civil partners can transfer income-producing assets (such as savings accounts or investment portfolios) to the lower-earning partner, making use of their personal allowance and lower rate bands.
6. Check Your Tax Code
With fiscal drag, it is increasingly important to make sure your PAYE tax code is correct. Errors in your tax code can mean you’re overtaxed or underpaid — and an unexpected tax bill at year end is no fun. Check your code on your payslip or via your HMRC Personal Tax Account.
Use our income tax calculator to see exactly how much income tax you owe under the current frozen thresholds — and how pension contributions or other adjustments could reduce your bill.