Your pay went up, the Chancellor swears rates "haven't gone up", and somehow more of your money is going to HMRC. That's fiscal drag, and after the November 2025 Budget it's set to keep working on your wallet until April 2031.
Most people assume their tax bill only rises when the headline rates of income tax change. In reality, the bigger lever is the thresholds — the income levels at which each rate kicks in. When those are frozen while wages and prices climb, you slowly drift into higher tax bands without anyone ever announcing a tax rise. This guide explains how it works, who it catches, and the legitimate steps you can take to soften the blow in 2026/27.
What is fiscal drag?
Fiscal drag is what happens when tax thresholds stay still while incomes rise. Inflation and pay rises push your income upwards in cash terms, but the points at which higher tax rates apply don't move with it. The result: a larger slice of your earnings falls into taxable territory, or into a higher band, even though the rates printed in the tax tables are unchanged.
It's sometimes called a "stealth tax" because there's no vote, no rate change and no headline — just a freeze that does the work quietly, year after year. The longer the freeze runs, the more it raises, because wages keep rising against a fixed line.
The thresholds that are frozen until 2031
For 2026/27 the income tax thresholds are:
- Personal allowance: £12,570 — income below this is tax-free.
- Basic rate (20%): £12,571 to £50,270.
- Higher rate (40%): £50,271 to £125,140.
- Additional rate (45%): over £125,140.
The personal allowance (£12,570) and the higher-rate threshold (£50,270) are frozen until 5 April 2031. The November 2025 Budget extended the freeze, which had previously been due to end in April 2028. The additional-rate threshold of £125,140 is frozen on the same footing. So for five more tax years these lines stay exactly where they are while your pay, hopefully, does not.
If you want the plain-English version of how the bands stack up, our guide on the UK income tax bands for 2026 walks through the allowances in order.
How a frozen threshold becomes a tax rise
Imagine the higher-rate threshold had been rising with inflation each year, as it historically did. A pay rise that merely kept pace with prices would leave your real position unchanged and your tax band the same. Freeze the threshold instead, and that same inflationary pay rise pushes a chunk of your income over £50,270 and into 40% tax.
Two things happen across the population:
- People are dragged into higher bands. Earnings that used to be taxed at 20% start being taxed at 40%.
- People are dragged into tax for the first time. As the £12,570 personal allowance stays fixed, rising wages and pensions pull more low earners over the tax-free line.
Official estimates put roughly 700,000 more people into income tax by 2030/31 because of the freeze, compared with a world where thresholds rose each year. None of them will have seen a "rate rise" — the rates are identical. The threshold simply stood still while they moved.
Worked example: the pay rise that's partly eaten
Priya earns £48,000 and is offered a £5,000 rise, taking her to £53,000. On paper that's a tidy bump. Let's see what the frozen higher-rate threshold does to it.
The higher-rate threshold is £50,270. So of her £5,000 rise:
- The slice from £48,000 to £50,270 — that's £2,270 — is taxed at the basic rate of 20%, costing £454 in income tax.
- The slice from £50,270 to £53,000 — that's £2,730 — is taxed at the higher rate of 40%, costing £1,092 in income tax.
| Slice of the £5,000 rise | Amount | Tax rate | Income tax |
|---|---|---|---|
| £48,000 to £50,270 | £2,270 | 20% | £454 |
| £50,270 to £53,000 | £2,730 | 40% | £1,092 |
| Total | £5,000 | — | £1,546 |
So £1,546 of her £5,000 rise goes in income tax before National Insurance is even counted. Part of the rise is taxed at double the rate of the rest, purely because the threshold didn't move with her. Had the higher-rate threshold risen in line with her pay, none of the increase would have crossed into 40%. That's fiscal drag in a single payslip.
The 60% trap: where drag bites hardest
Above £100,000 there's a sharper version of the same problem. Once your adjusted net income exceeds £100,000, your personal allowance is withdrawn by £1 for every £2 over the line. By £125,140 it's gone entirely.
Across that £100,000–£125,140 band you pay 40% income tax on the income and lose allowance at the same time, producing an effective marginal rate of about 60%. Every extra £1 of salary in that band leaves you with roughly 40p. The £100,000 trigger is itself a frozen figure, so as wages rise, more people get caught — classic fiscal drag, just at a steeper gradient.
The good news: the trigger is adjusted net income, not gross pay, and you can reduce it. Personal pension contributions and Gift Aid donations both lower your adjusted net income, which can pull you back under £100,000 and reclaim some or all of the lost allowance. In that band, a £1 pension contribution can effectively cost you around 40p after the tax and allowance you save. Scotland has different income tax bands, but the personal allowance taper is UK-wide.
The High Income Child Benefit Charge
Drag has a second sting for parents. The High Income Child Benefit Charge (HICBC) claws back Child Benefit once the higher earner in a household passes its income threshold. Because that threshold and the bands around it don't move with wages either, more families drift into the charge over time without any change to their circumstances beyond a normal pay rise. Our dedicated guide to the High Income Child Benefit Charge sets out the current threshold and how the taper works.
The same lever that reduces your adjusted net income for the 60% trap — pension contributions and Gift Aid — also reduces the income figure used for the HICBC, so the two mitigations often work together for higher-earning parents.
Practical ways to fight fiscal drag
You can't unfreeze the thresholds, but you can manage how much of your income is exposed to the higher bands. None of this is avoidance — it's using the allowances Parliament put there on purpose.
Pension contributions
Pension contributions are the single most effective tool. They get tax relief at your marginal rate and reduce your adjusted net income, which can drop you out of the higher-rate band, the 60% trap or the HICBC. For a higher-rate taxpayer, £1 in the pension can cost as little as 60p after relief — and in the £100k–£125,140 band, closer to 40p. See our guide to how pension tax relief works for the mechanics.
Salary sacrifice
Sacrificing salary into a workplace pension reduces your gross pay before tax and National Insurance are calculated. That can keep you below the higher-rate threshold or the £100,000 cliff edge, while saving employee NIC on the sacrificed amount too.
ISAs and tax-free wrappers
Once thresholds are dragging more of your income into tax, shielding your savings and investment returns matters more. ISA interest, dividends and gains are tax-free and don't count towards your income at all. That's increasingly valuable given a personal savings allowance of just £1,000 (basic rate), £500 (higher rate) and £0 (additional rate), a £500 dividend allowance and a £3,000 Capital Gains Tax annual exempt amount.
Marriage Allowance
If one spouse or civil partner earns below the £12,570 personal allowance and the other is a basic-rate taxpayer, the lower earner can transfer part of their unused allowance. It's a modest but easy saving for couples where one partner has been dragged just over the tax-free line.
Dividend planning for company owners
If you run a limited company, the salary-versus-dividend mix gives you levers an employee doesn't have. Dividends are taxed at 10.75%, 35.75% and 39.35% across the bands, with a £500 allowance, and they don't attract National Insurance. Keeping income below the higher-rate threshold where possible, and using a spouse's allowances and bands, can blunt the drag. Our pieces on the most tax-efficient salary for directors and the current dividend tax rates and allowances go deeper.
Don't forget the bands move you, not just your salary
Fiscal drag isn't only about employment income. Frozen thresholds catch pension income, rental profits, savings interest and dividends in exactly the same way — it's your total taxable income that decides which band the top slice falls into. A landlord whose rents rise with the market, or a saver finally earning a decent return, can both find themselves nudged into 40% territory even with an unchanged day job. Planning across all your income sources, not just your payslip, is what keeps you out of the higher bands.
When does this actually end?
On current policy, the personal allowance, the higher-rate threshold and the additional-rate threshold stay frozen until 5 April 2031. That's five more tax years of the line standing still while pay and prices move. Unless a future Budget unfreezes them early, the rational response is to assume the drag continues and to use your allowances every single year — they generally can't be carried forward, so an unused ISA or pension allowance is lost for good.
Sources
- Income Tax rates and Personal Allowances — GOV.UK
- Income over £100,000 — GOV.UK
- Income Tax: introduction — GOV.UK
- Rates and thresholds for employers 2026 to 2027 — GOV.UK
- Marriage Allowance — GOV.UK
- High Income Child Benefit Charge — GOV.UK
Frequently asked questions
Why is my tax bill higher when the rates haven't changed?
Because the thresholds where each tax rate starts are frozen. As your pay rises, more of your income crosses fixed lines into higher bands, so you pay more tax even though the percentages are unchanged. That effect is called fiscal drag.
How long are the income tax thresholds frozen for?
The personal allowance (£12,570), the higher-rate threshold (£50,270) and the additional-rate threshold (£125,140) are frozen until 5 April 2031. The November 2025 Budget extended the freeze, which had previously been due to end in April 2028.
What is the 60% tax trap and how do I avoid it?
Between £100,000 and £125,140 of adjusted net income, your personal allowance is withdrawn by £1 for every £2 over £100,000, producing an effective marginal rate of about 60%. You can reduce your adjusted net income — and reclaim the allowance — with personal pension contributions and Gift Aid donations.
Does getting a pay rise into the higher-rate band ever leave me worse off?
No. Only the part of your income above £50,270 is taxed at 40%; the rest is still taxed at lower rates. A pay rise always leaves you with more take-home pay overall — but the portion above the threshold is taxed more heavily, so you keep less of that slice than you might expect.
