TL;DR
- Personal allowance and higher-rate threshold remain frozen for 2026/27
- ONS CPI was 3.3 per cent in March 2026, up from 3.0 per cent in February
- Frozen thresholds plus inflation-linked pay rises mean more income is taxed at the higher marginal rate
- The Bank of England's April Monetary Policy Report set out scenarios where CPI could peak above 6 per cent in early 2027 if oil prices remain elevated
- HM Treasury's average of new forecasts puts unemployment at 5.5 per cent in 2026 Q4
Last reviewed: 15 May 2026
Key facts
- Personal allowance: £12,570 (frozen)
- Higher-rate threshold (England, Wales, NI): £50,270 (frozen)
- Additional-rate threshold: £125,140 (frozen)
- CPI inflation (March 2026, ONS): 3.3 per cent
- CPI inflation (February 2026, ONS): 3.0 per cent
- BoE peak CPI scenario: Above 6 per cent in early 2027 in the higher oil price scenario
What fiscal drag is
Fiscal drag is the effect of leaving tax thresholds unchanged in nominal terms while wages and prices rise. As pay rises in line with inflation, a larger share of income crosses each tax threshold. The personal allowance and higher-rate threshold remain frozen, so more taxpayers move into the higher-rate band over time even though their real income has not increased. The effect is sometimes described as a stealth tax because it raises revenue without a headline rate change.
Why 2026/27 amplifies the effect
Inflation rose to 3.3 per cent in March 2026 from 3.0 per cent in February, driven primarily by transport costs and fuel prices. The Bank of England's April Monetary Policy Report set out scenarios in which CPI could peak above 6 per cent in early 2027 if oil prices remain elevated. Pay settlements in inflation-linked sectors translate directly into higher gross pay, while the thresholds remain at £12,570, £50,270 and £125,140. The Resolution Foundation has highlighted that this combination weakens disposable incomes alongside Council Tax rises of 4.99 per cent for most English councils.
How it lands at common pay points
At £30,000 gross, all earnings above £12,570 are taxed at 20 per cent. A 5 per cent pay rise adds £1,500 to gross pay, of which £300 is income tax and a further share goes to National Insurance, plus any student loan repayment. At £50,000 gross, an inflation pay rise crosses the higher-rate threshold, so each pound earned above £50,270 is taxed at 40 per cent. At £100,000 gross, the £100,000 to £125,140 band carries an effective 60 per cent marginal rate because the personal allowance tapers at £1 for every £2 of income over £100,000.
What this means alongside Council Tax and bills
Most English councils raised Council Tax by 4.99 per cent for 2026/27, with seven councils approved to raise it by more. Energy bills are forecast to rise in July 2026 when Ofgem publishes the next cap on 27 May. Frozen thresholds, rising Council Tax and the prospect of higher energy bills together account for the squeeze on real disposable income that the Resolution Foundation has tracked across the 2026/27 tax year.
What workers can review
Salary sacrifice into a pension reduces gross taxable pay, which can keep income below a threshold. Higher-rate taxpayers can claim the higher-rate tax relief on personal pension contributions through self assessment if not already collected through the employer's scheme. Marriage allowance allows the lower-earning partner to transfer £1,260 of personal allowance where eligible. Anyone whose income crosses £100,000 should model the personal allowance taper before declining a pay rise that lands them inside the 60 per cent band.
Disclaimer. This article is for general information only and does not constitute financial, tax, immigration or legal advice. Figures, thresholds and rules can change. Always check the current position with the relevant authority (GOV.UK, HMRC, FCA, Ofgem or the appropriate regulator) before acting.
Frequently asked questions
How long are the thresholds frozen for?
Personal allowance and higher-rate thresholds have been frozen on a multi-year basis. Check the latest Autumn Budget and Spring Budget documents on GOV.UK for the current end-date of the freeze.
Does fiscal drag apply in Scotland?
Scottish income tax bands differ from the rest of the UK. The personal allowance is reserved to the UK government and remains £12,570. Scottish band thresholds are set by the Scottish Parliament.
Why is the 60 per cent rate not in the headline rates?
The 60 per cent figure is an effective marginal rate. It results from the personal allowance tapering at £1 for every £2 of income over £100,000 on top of the 40 per cent income tax rate.
Will the freeze end soon?
The freeze runs to the end-date set in the most recent Budget. Any change is announced in a Budget or Autumn Statement. There has been no announcement of an early end to the freeze.
Does pension salary sacrifice work for everyone?
It is only available where the employer offers it. It reduces gross pay for tax and National Insurance purposes. It can affect mortgage affordability calculations, statutory maternity pay and some state benefits, so the trade-offs should be modelled before opting in.
