Fiscal Drag: How Frozen Tax Thresholds Are Costing Millions of Workers Hundreds of Pounds
The term "fiscal drag" describes a quiet form of tax increase that requires no change in tax rates at all. When the government freezes the thresholds at which income tax becomes payable — the personal allowance and the higher rate threshold — but wages continue to rise with inflation, more and more workers are pulled into the tax net, or into higher tax brackets, simply because the goalposts are not moving.
The UK has been living through a sustained period of fiscal drag since April 2021, when the personal allowance was frozen at £12,570 and the higher rate threshold at £50,270 under plans originally announced to last until April 2026 — and since extended to 2028, and then again to 2031. Over that decade-long freeze, with inflation running at levels not seen since the 1980s, the effect on workers' real tax burden has been substantial.
What the numbers actually look like
If the personal allowance had risen with the Consumer Prices Index since April 2021, it would be approximately £15,480 by the 2025-26 tax year. Instead it remains at £12,570 — a £2,910 shortfall. At the 20% basic rate, that frozen portion costs a basic-rate taxpayer an additional £582 per year compared to what they would pay under an inflation-indexed system.
For a higher-rate taxpayer, the situation is worse. If the higher rate threshold had kept pace with inflation it would now be around £60,000 or higher. At £50,270, a worker earning £60,000 pays 40% on around £10,000 of income that would be in the basic rate band under an indexed system — an extra £2,000 per year in income tax alone.
The scale of the effect
The Office for Budget Responsibility estimates that the freeze will cost individuals an average of over £1,000 per year by 2027-28. The number of higher-rate taxpayers — those paying 40% — is forecast to rise from around 4.5 million in 2020-21 to over 8 million by 2027-28, not because their real incomes have soared but because the 40% threshold has effectively moved down in real terms. That is 12 million higher-rate taxpayers against roughly 6 million at the threshold freeze's start: a near-doubling driven almost entirely by fiscal drag.
The total revenue from the freeze, accumulated over the decade to 2028, is estimated at over £100 billion — making it by far the largest single stealth tax in modern British history. For context, the 2024 NI cuts that received extensive political attention are estimated to cost the Exchequer roughly £10 billion per year — meaning the threshold freeze claws back ten times as much as the NI headline cut returns.
Who is hit hardest?
The freeze hits people who have received wage increases — particularly those whose salary has grown from below the higher rate threshold to above it. A nurse who earned £45,000 in 2021 and now earns £55,000 following NHS pay uplifts is now a higher-rate taxpayer. She was not one in 2021. Her real pay has not risen that dramatically — much of the nominal increase was simply keeping up with inflation — but her marginal rate has jumped from 20% to 40%.
This effect is particularly pronounced in the public sector, where pay freezes followed by large catch-up increases created rapid nominal salary growth for workers who in real terms are no better off. Calculate your take-home pay at £50,000 and compare it with what you would have taken home at the same salary in 2021 to see the fiscal drag effect directly.
Conclusion
Fiscal drag is a mechanism that allows governments to raise taxes without announcing tax rises — and it is operating at an historically large scale in the UK right now. Understanding it helps you make better decisions about salary sacrifice, pension contributions, and other strategies to manage your adjusted net income. Use our take-home pay calculator to see your current tax burden, and explore our pension and salary sacrifice pages to understand how to reduce it.