Tax rates haven’t risen for most workers — yet millions are paying more income tax than ever. Here’s why, and what you can do about it.
If your salary has gone up in the past few years, you might have noticed your tax bill has risen faster than your pay. You are not imagining it. Millions of UK workers are paying significantly more income tax than they were in 2021 — not because the government raised tax rates, but because of a policy known as fiscal drag.
It is one of the most effective forms of stealth taxation ever devised, and it is currently raising more money for the Treasury than almost any other policy.
Fiscal drag happens when tax thresholds are not increased in line with inflation or wage growth. As your income rises — whether from a pay rise or just inflation — more of it gets pulled into taxable territory or into higher tax bands, even though the government has not officially raised tax rates.
Think of it like a net that stays in one place while the fish swim upward. The net did not move — but more fish are caught.
The UK version is particularly powerful because in 2022, the government announced that the personal allowance and higher rate threshold would be frozen at their current levels until 2028 (later extended to 2031). With wages rising due to inflation and pay settlements, this freeze is having a dramatic effect on tax bills.
The personal allowance — the amount you can earn tax-free — has been frozen at £12,570 since April 2021. In a world where wages stand still, this would not matter. But wages have risen significantly since then. The result is that more of your income is now taxable than it was four years ago.
| Salary | Tax in 2021/22 | Tax in 2026/27 | Extra tax paid |
|---|---|---|---|
| £25,000 | £2,486 | £2,486 | £0 (threshold same) |
| £30,000 | £3,486 | £3,486 | £0 (threshold same) |
| £35,000 | £4,486 | £4,486 | £0 (threshold same) |
On a fixed salary, the freeze changes nothing. But here is the key: most people’s salaries have not been fixed. Average wages in the UK rose by around 20% between 2021 and 2026. Someone who earned £30,000 in 2021 and now earns £36,000 is paying more tax — and the frozen threshold means they keep less of each extra pound they earn.
The Office for Budget Responsibility estimated that freezing income tax thresholds until 2027/28 would raise over £55 billion by 2030/31 — making it one of the largest tax increases in recent history, achieved without ever officially raising a rate.
The government later extended the freeze to 2031, increasing the total tax take further still. By 2031, the cumulative effect will have been roughly equivalent to raising the basic rate of income tax by several percentage points.
The higher rate threshold — the point at which you start paying 40% tax — has been frozen at £50,270. With wages rising, more people are crossing this threshold for the first time.
This matters particularly because moving from basic to higher rate tax is a significant jump. On salary above £50,270:
A nurse earning £48,000 in 2021 who has received inflation-matching pay rises might now earn £57,000 — and find themselves paying higher rate tax on £6,730 of their income, a tax they were not paying before.
See exactly how much tax you pay at your current salary
The current freeze on income tax thresholds is set to end in April 2028, at which point thresholds will begin to rise with inflation again. However, the government announced in the 2025 Budget that the National Insurance thresholds will remain frozen until April 2028 as well.
The Scottish Government sets its own income tax rates and thresholds, which have diverged from the rest of the UK in recent years. Scottish taxpayers have different bands and rates — check the Scottish Government’s website for the current Scottish rates.
Even after the freeze ends in 2028, the cumulative effect of years of frozen thresholds means millions of people will continue paying more tax than they would have if thresholds had risen with inflation throughout.
Fiscal drag is a fact of life for now, but there are legal ways to reduce its impact on your take-home pay:
Contributing more to a pension reduces your taxable income and can pull you back below key thresholds. If you are close to the higher rate threshold (£50,270), a pension contribution that keeps you in the basic rate band saves you 40p in tax for every £1 contributed rather than 20p.
Salary sacrifice arrangements — for pensions, electric vehicles, or cycle-to-work — reduce your gross salary for tax and NI purposes. This is more efficient than paying from your net salary because you save both income tax and National Insurance.
Moving savings and investments into ISAs protects future income (interest and dividends) from the tax drag effect. As thresholds stay frozen, even modest savings interest can push you over your personal savings allowance — an ISA avoids this completely.
Make sure you are claiming everything you are entitled to — working from home relief, professional subscriptions, gift aid donations, and the marriage allowance if applicable. These all reduce your taxable income.