Even if your salary stays the same — or goes up slightly — you may be worse off in real terms. The government has frozen income tax thresholds since 2021/22 while inflation has driven up the cost of everything. This "fiscal drag" is a stealth tax increase affecting millions of workers.
What is fiscal drag?
Fiscal drag occurs when tax thresholds are not increased in line with inflation or wage growth. As wages rise (even by inflation alone), more income falls into higher tax bands. People who were basic rate taxpayers get pulled into the higher rate bracket without earning any more in real terms.
The frozen thresholds
The following thresholds have been frozen since 2021/22 and are expected to remain frozen until at least 2027/28:
- Personal Allowance: £12,570 (frozen since April 2021)
- Basic rate band ceiling: £50,270 (frozen since April 2021)
- NI Primary Threshold: £12,576 (frozen)
If these had been uprated with CPI inflation (which peaked at 11.1% in October 2022), the Personal Allowance would be approximately £15,000 by now and the higher rate threshold approximately £60,000.
How much is it costing you?
Someone earning £35,000 in 2021 who received inflationary pay rises to reach £40,000 by 2026 has seen their income tax bill increase by approximately £1,000/year — purely from threshold freezes. They are no better off in purchasing power but paying significantly more tax.
Workers crossing £50,270 have been hit hardest: they now pay 40% on the excess rather than 20%, a doubling of the marginal rate on income that is not genuinely "higher" in real terms.
What can you do about it?
- Pension contributions: reduce your taxable income below threshold boundaries (particularly effective near £50,270 or £100,000)
- Salary sacrifice: EV schemes, cycle-to-work, and additional pension contributions all reduce your taxable pay
- Use your ISA allowance: shelter savings growth from tax entirely
- Claim all reliefs: WFH allowance, professional subscriptions, Gift Aid higher-rate relief
See how threshold freezes affect you
Use the income tax calculator to compare your current take-home pay with what it was a year ago at the same salary. The "Does a pay rise actually help?" guide shows the marginal impact of raises at different salary points.