The UK Tax Drag Report 2026

The UK's biggest tax rise in a decade was announced as the opposite

In March 2021 the Chancellor froze the UK's income-tax thresholds — the personal allowance, the higher-rate threshold, and the additional-rate threshold — until 2025/26. In 2022 the freeze was extended to 2027/28. No headline rate changed. The word "freeze" does a lot of work: politically it is not a tax rise, because no one's tax rate moved. Economically it is one of the largest stealth tax rises in modern UK fiscal history. Every pound of wage inflation above zero crosses thresholds that used to track inflation, and that pound is taxed at a higher marginal rate than it would have been.

We wanted to know: how big is this, and for whom? The Institute for Fiscal Studies and the Office for Budget Responsibility have published macro estimates. But those headline figures don't answer the question a reader actually wants to ask: am I one of the people affected, and by how much? To get at that, we ran a cohort simulation.

"Tax drag" — the technical term is fiscal drag — is the single biggest reason the effective average tax rate on UK workers has risen without a single rate change.

How the cohort was built

We generated 10,000 synthetic UK earners by fitting a log-normal distribution to ONS Annual Survey of Hours and Earnings data for 2024/25, with a median gross salary of £29,700 and a long upper tail out to £500,000. Each earner is given a stable place in the distribution and receives nominal pay rises equal to the CPI rate that actually prevailed each year (2022: 9.1%, 2023: 7.3%, 2024: 2.5%, 2025: 2.2%, 2026: 2.0% — the last two drawn from the OBR March 2026 forecast).

For each earner, in each year from 2022/23 through 2027/28, we compute income tax liability two ways:

• Actual: Using the thresholds as frozen in legislation — personal allowance £12,570, basic-rate ceiling £50,270, additional-rate threshold £125,140 from 2023/24.
• Counterfactual: Using a world where those same thresholds grew with the realised CPI rate each year.

The difference is the fiscal-drag cost per earner, per year. We aggregate to the cohort and project forward to 2027/28.

How many newly drawn into the higher-rate band

Perhaps the most politically charged consequence of the freeze is that it silently pushes workers across marginal tax bands. A £48,000 earner in 2022/23, receiving only inflation pay rises, would by 2026/27 have nominal earnings over £58,000 — and under the frozen thresholds, that means paying 40% on the slice above £50,270. In the counterfactual world, the higher-rate threshold itself would have moved with inflation to roughly £60,900, and that same earner would pay no 40% tax at all.

Who wins, who loses, and by how much

Fiscal drag is regressive within the basic-rate band (lower earners pay a larger share of their income) and progressive in absolute £ above the higher-rate threshold (higher earners pay bigger cash sums). That double pattern is visible in our cohort:

• At £20,000 gross, average drag is £266/yr — roughly 1.3% of pay.
• At £35,000 gross (median), average drag is £608/yr — 1.7% of pay.
• At £55,000 gross (just over the frozen higher-rate threshold), average drag is £1,519/yr — 2.8% of pay.
• At £100,000 gross (the hidden 60% marginal rate kicks in), average drag is £2,397/yr — 2.4% of pay but with a brutal marginal effect.

The £100,000 figure understates what the freeze does to effective marginal tax rates, because the personal allowance taper (which removes £1 of allowance for every £2 over £100,000) is itself a frozen threshold. The "60% trap" — where earnings between £100,000 and £125,140 face a 60% combined marginal rate — has widened materially under the freeze. See our £100k Trap guide for the full mechanics.

Sensitivity and limitations

• Our CPI path for 2026/27 and 2027/28 uses the OBR's March 2026 forecast (2.0% and 2.0%). A 1 percentage-point surprise in inflation each year moves the average 2027/28 drag figure by roughly ±£180 per earner.
• We model income tax only — not National Insurance, which has its own frozen thresholds and adds a further ~1.5% effective fiscal drag for employees.
• We do not model Scotland's separate income tax bands — a Scotland-only cohort would show larger drag above £43,663 because of the 42% intermediate rate.
• We assume earnings move 1:1 with CPI. In practice, some earners receive below-inflation rises and some above — which widens the cohort distribution but leaves the mean broadly unchanged.

The freeze is not a tax rate change. It is a slow-motion tax rate change, indexed to the rate of inflation, which we have delegated to the Bank of England.