Since 2021/22, the UK government has frozen the Personal Allowance at £12,579 and the basic rate limit at £50,270. During the same period, inflation has increased prices by roughly 20% and wages have risen to keep pace. The result is “fiscal drag” — millions of workers are being pulled into higher tax bands without any explicit tax rise. This is a hidden pay cut that costs the average worker hundreds of pounds per year, and it is set to continue until at least 2027/28.[1]
What is fiscal drag and how does it work?
Fiscal drag is the phenomenon where frozen tax thresholds combined with wage inflation silently increase the proportion of income taken in tax. In a normal system, tax thresholds rise each year in line with inflation so that the same real income attracts the same real tax. When thresholds are frozen, inflation pushes wages up while the thresholds stay put — meaning more of your income falls into taxable bands each year.
The mechanism works on three levels simultaneously. First, people previously earning below £12,579 are dragged into paying tax for the first time as their wages rise above the frozen threshold. Second, people in the basic rate band (£12,579–£50,270) are dragged into the higher rate band as their salary crosses £50,270 with inflation. Third, higher earners approaching £100,000 are dragged into the Personal Allowance taper zone. Each of these creates new taxpayers or higher-band taxpayers without any legislative change.
The Treasury estimates that the threshold freeze raises approximately £6 billion per year by 2027/28 — more than a 1p rise in the basic rate of income tax would generate. It is politically expedient because it happens automatically and invisibly: no headline “tax rise” appears in any budget, yet millions of people pay more.
How much extra tax am I paying because of frozen thresholds?
The impact depends on your salary and how much it has grown since2021/22. If thresholds had risen with CPI inflation (approximately 20% since 2021), the Personal Allowance would be roughly £15,095 and the basic rate limit approximately £60,324. Instead, they remain at £12,579 and £50,270 respectively.
For a worker earning £35,000 (common for mid-career in many sectors): with inflation-adjusted thresholds, approximately £2,516 more of their income would be tax-free (the difference between £12,579 and ~£15,095). The extra tax paid is roughly £503/year in income tax alone — approximately £42/month silently taken from your take-home pay compared to where you would be with inflation-linked thresholds.
The impact is larger for those crossing from basic to higher rate. If your salary has risen from £48,000 in 2021 to £58,000 in 2026 (a 20% inflation match), approximately £7,730 of your income is now taxed at 40% instead of 20% — costing you an extra £1,546/year compared to inflation-adjusted thresholds. Use our calculator at £58,000 to see how this affects your take-home.
How many people have been dragged into higher tax bands?
HMRC statistics show that the number of higher rate taxpayers has increased significantly since the freeze began. Before the freeze (2020/21), approximately 4.2 million people paid higher rate tax. By 2026/27, this has risen to an estimated 5.5+ million — not because the higher rate has changed, but because the £50,270 threshold has remained static while wages have risen. Over 1.3 million additional people now pay 40% tax purely due to fiscal drag.
The same pattern applies at the lower end: workers who previously earned below £12,579 (particularly younger workers, part-time workers, and those starting new careers) are now pulled into the tax system as the National Minimum Wage and market wages have risen above the frozen threshold. In 2021, the NMW was £8.91/hour (roughly £18,500/year full-time). In 2026/27, it is £12.21/hour (roughly £25,400/year) — well above the unchanged £12,579 Personal Allowance.
National Insurance thresholds have also been frozen, compounding the effect. The NI Primary Threshold sits at £87/month — if this had risen with inflation, many lower earners would pay less NI. The combined effect of frozen IT and NI thresholds means the fiscal drag hits twice on the same wage growth.
What can I do to offset the impact of fiscal drag?
While you cannot change government policy, several strategies can reduce the personal impact of frozen thresholds:
- Salary sacrifice into a pension: contributions reduce your taxable income, potentially keeping you below the £50,270 higher rate threshold or the £100,000 PA taper start. The tax relief at 40% makes this doubly valuable for anyone dragged into the higher rate band. See our salary sacrifice guide.
- Maximise ISA contributions: while ISAs do not reduce your income tax bill directly, they shelter investment returns from future tax. As fiscal drag pushes more of your income into higher bands, keeping growth outside the tax system becomes increasingly valuable.
- Claim all available reliefs: Marriage Allowance, working from home relief, professional subscriptions — each reduces your taxable income slightly. Combined, they can offset some of the fiscal drag effect. See our guide to reducing your tax bill.
- Negotiate benefits over salary: salary sacrifice for electric vehicles, pension contributions above the match, or additional annual leave all reduce taxable income while maintaining overall compensation value.
How does fiscal drag compare to an explicit tax rise?
The freeze from 2021/22 to 2027/28 is estimated to raise approximately £40 billion cumulatively for the Treasury. To raise the same amount through explicit rate changes, the government would need to increase the basic rate of income tax by approximately 2p in the pound (from 20% to 22%) — a politically toxic move that would dominate headlines. The threshold freeze achieves the same revenue with barely any public attention.
This asymmetry explains why governments of all parties have used fiscal drag as a revenue-raising tool. It requires no legislation (thresholds simply stay where they are), creates no headline “tax rise” for opponents to campaign against, and affects everyone gradually rather than hitting a specific group dramatically. The downside is that it is regressive in its effects: it hits lower and middle earners proportionally harder because a larger share of their income sits near the thresholds.
Understanding that a “pay rise” that merely matches inflation is actually a real-terms tax increase is essential for salary negotiations. If inflation is 3% and you receive a 3% raise, your purchasing power stays the same but you pay more tax because the thresholds have not moved. To maintain the same after-tax purchasing power, you need a raise above inflation — roughly 3.5-4% at basic rate, or 4-5% at higher rate, to offset both inflation and fiscal drag combined.
When will the threshold freeze end?
The current freeze is announced to last until 2027/28. After that, the government will decide whether to resume inflation-linking or extend the freeze further. Given the significant revenue the freeze generates and the political path of least resistance it represents, there is a real possibility it will be extended — particularly if public finances remain under pressure.
If thresholds are eventually unfrozen and linked to CPI, the adjustment will not be backdated — you will not receive a refund for the years of fiscal drag. The higher effective tax rates during the freeze period are permanent in their impact on your wealth. This makes it even more important to use available strategies (pensions, ISAs, salary sacrifice) to reduce taxable income during the freeze years while the benefit is greatest.
To see what your current take-home pay looks like and model the impact of a pay rise, use our income tax calculator. Compare your salary from 2021 (when the freeze began) against today to see how much additional tax you now pay on the same real income. For negotiation strategies that account for fiscal drag, see our negotiating a pay rise guide.
Sources
- HMRC — Income Tax rates and Personal Allowances. Personal Allowance frozen at £12,579 since 2021/22. Basic rate limit frozen at £50,270. Accessed July 2026.
- HMRC — National Insurance rates and categories. NI thresholds frozen alongside income tax thresholds. Accessed July 2026.
- Office for Budget Responsibility — Income tax forecasts. Revenue impact of threshold freeze estimated at £6bn/year by 2027/28. Accessed July 2026.