Frozen Income Tax Thresholds UK: Fiscal Drag Explained

What frozen thresholds mean in practice

Income tax in the UK operates through a system of thresholds. The personal allowance (12,570 pounds in 2026/27) is the amount you can earn before paying any income tax at all. The basic rate of 20% applies between the personal allowance and the higher rate threshold (50,270 pounds). The higher rate of 40% applies between 50,270 pounds and 125,140 pounds, where the personal allowance is fully tapered away. When these thresholds are frozen while wages and prices rise, the proportion of income subject to tax increases automatically -- without Parliament voting for a tax rate increase. This is fiscal drag, sometimes called the stealth tax.

Under the freeze, a worker earning 30,000 pounds in 2021 who has received pay rises of 3.4% per year is now earning approximately 33,400 pounds. They are still a basic rate taxpayer, but they are paying income tax on 0 more of their income than if the personal allowance had risen with inflation. If the personal allowance had been uprated by CPIH inflation since 2021, it would now be approximately 15,750 pounds -- meaning the worker would have 3,180 pounds more tax-free income, saving approximately 636 pounds per year in income tax at the basic rate.

The scale of fiscal drag: who is affected

The freeze affects every income taxpayer in England, Wales and Northern Ireland (Scotland operates its own income tax bands). The IFS estimates that approximately 1.5 million additional workers have been drawn into income tax since 2021 as a direct result of the freeze -- people whose incomes would have remained below the personal allowance if it had risen with inflation, but who now cross the threshold because thresholds have not kept pace with wages. These new taxpayers face a marginal effective tax rate of 20% on earnings they would previously have received tax-free.

At the higher rate level, approximately 700,000 more workers have been pulled into the 40% band since 2021. For a worker pushed into the higher rate by the freeze, the marginal effective tax rate on earnings above 50,270 pounds is 40% income tax plus 2% employee National Insurance (for most workers), meaning 42p in every additional pound goes to the government. If the threshold had risen with CPIH inflation from its 2021 level, it would now be approximately 63,500 pounds -- meaning workers earning between 50,270 pounds and 63,500 pounds would be paying basic rate rather than higher rate on that portion of their income.

Interaction with the high income child benefit charge

The fiscal drag effect is amplified for families claiming Child Benefit. The High Income Child Benefit Charge (HICBC) begins to claw back Child Benefit where one parent earns above 60,000 pounds (following a reform in April 2024 that raised the threshold from 50,000 pounds), and fully removes it at 80,000 pounds. As more workers are pushed through these thresholds by the combination of rising wages and frozen thresholds, more families face the effective marginal tax rate associated with the HICBC tapering. For a family with two children, where Child Benefit is 2,212 pounds per year (2026/27 rates), the HICBC creates an effective marginal rate of approximately 55-60% on earnings in the 60,000-80,000 pounds band.

National Insurance thresholds

National Insurance thresholds have also been subject to freeze and adjustment. The Primary Threshold -- below which employees pay no National Insurance -- was raised to 12,570 pounds in July 2022 to align with the personal allowance, and has remained at that level. The Upper Earnings Limit (UEL), above which the employee NI rate falls from 8% to 2%, is set at 50,270 pounds -- aligned with the higher rate income tax threshold and similarly frozen. Employer National Insurance contributions were increased from April 2025, with the rate rising from 13.8% to 15.0% and the secondary threshold falling from 9,100 pounds to 5,000 pounds. The employer NI increase has fed through into hiring decisions and pay negotiation, with many employers indicating it has constrained their ability to fund pay rises.

Dividend tax and the investment income threshold freeze

Investors and company directors who take income as dividends have been affected by the reduction in the tax-free dividend allowance and the freezing of dividend tax bands. The dividend allowance was cut from 2,000 pounds to 500 pounds in April 2024, meaning more dividend income is taxable. Dividend tax rates also increased from April 2026: the basic rate rose from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. For a director or investor with dividend income of 30,000 pounds above the allowance, these changes represent several hundred pounds of additional annual tax.

The pension contribution interaction

The interaction between frozen thresholds and pension contributions creates both a problem and an opportunity. The problem: workers pushed into the higher rate by fiscal drag pay 40% on marginal income rather than 20%. The opportunity: making additional pension contributions reduces taxable income, potentially pulling a worker back below the higher rate threshold and reclaiming the difference between basic and higher rate tax relief on contributions. For a worker earning 52,000 pounds, making 1,730 pounds of additional pension contributions would reduce taxable income back to 50,270 pounds, saving approximately 346 pounds per year in income tax at higher rate versus basic rate. This is one of the few levers available to mitigate the fiscal drag effect within the current system.

When will the freeze end?

Current government plans extend the income tax threshold freeze until April 2028, seven years in total. This is one of the longest threshold freezes in modern UK tax history. In its March 2026 Economic and Fiscal Outlook, the OBR projected that the cumulative revenue impact of the freeze -- relative to uprating thresholds with inflation -- would be tens of billions of pounds per year by the time the freeze ends in 2028. Whether thresholds will be uprated when the freeze ends, and by what measure, will be a significant tax policy decision. Uprating to fully restore inflation-adjusted levels from 2021 would require large increases in both the personal allowance and the higher rate threshold.

What is the income tax personal allowance in 2026/27?

The income tax personal allowance is 12,570 pounds in 2026/27, frozen since April 2021. This applies in England, Wales and Northern Ireland. Scotland sets its own income tax bands and rates.

What is fiscal drag?

Fiscal drag occurs when income tax thresholds are frozen while wages and prices rise. More workers cross the threshold into tax, or into higher rate bands, without any increase in the stated tax rates. It is sometimes called a stealth tax increase because it raises revenue without a Parliamentary vote to change tax rates.

How many people are paying more tax due to frozen thresholds?

The IFS estimates approximately 1.5 million more people have been drawn into income tax since the freeze began in 2021, and approximately 700,000 more into the 40% higher rate band.

What would the personal allowance be if it had kept pace with inflation?

If the personal allowance had been uprated by CPIH inflation since April 2021, it would be approximately 15,750 pounds in 2026/27, compared with the actual frozen figure of 12,570 pounds -- a difference of approximately 3,180 pounds. At the basic rate of 20%, this means basic rate taxpayers pay approximately 636 pounds more per year in income tax than they would under an inflation-uprated threshold.

When will the income tax threshold freeze end?

Current government plans extend the income tax threshold freeze until April 2028. No commitment has been made on whether or by how much thresholds will be uprated when the freeze ends.