Fiscal Drag: The Silent Tax Rise
Tax rates do not have to increase for you to pay more tax. Frozen thresholds and rising wages do the work quietly. Since 2022, this has been the largest stealth tax mechanism in modern UK fiscal history.
Income tax is charged in bands — the rate you pay depends on which band your income falls into. These bands are defined by thresholds: the points at which a higher rate begins. When those thresholds are frozen — held constant year after year — and wages rise with inflation, more of your income is pulled into higher tax bands automatically. Your pay packet grows in nominal terms, but a larger share of it is taxed at a higher rate. The government collects more revenue without changing a single tax rate. That is fiscal drag.
The mechanism is effective precisely because it is invisible. There is no announcement of a rate rise. Most people see their gross pay increase and assume they are better off — without noticing that a disproportionate share of the increase is going to HMRC.
The UK's Freeze: 2022 to 2028
The main UK Income Tax thresholds were frozen in April 2022 and are currently scheduled to remain frozen until April 2028 — a six-year freeze at a time of historically elevated wage and price inflation. The freeze was announced in the March 2021 Budget and extended in subsequent fiscal statements.
| Threshold | 2021/22 Level | 2025/26 Level | If uprated with CPI since 2022 (est.) |
|---|---|---|---|
| Personal Allowance | £12,570 | £12,570 (frozen) | ~£14,800+ |
| Basic rate limit / Higher rate threshold | £50,270 | £50,270 (frozen) | ~£59,000+ |
| Additional rate threshold | £150,000 | £125,140 (reduced in 2023) | N/A — was lowered, not frozen |
CPI uprating estimates are illustrative only. Actual threshold levels are set by government each fiscal year.
A Worked Example: The Crossing Point
The freeze affects people differently depending on where their income sits relative to the frozen boundaries. The most significant impact is felt by people whose wages have risen through — or are approaching — the higher rate threshold.
This person received pay rises broadly matching CPI inflation — meaning their real-terms purchasing power is roughly unchanged. Yet in nominal terms, their salary crossed the higher rate threshold, and they now pay 40p in every pound on that £5,230 — up from 20p. The government has collected an additional ~£1,046 per year from this individual through fiscal drag alone, without any change in the headline rate.
Multiply this across the millions of workers who have crossed the higher rate threshold for the first time since 2022, and the fiscal significance becomes clear. The OBR estimated in autumn 2022 that the freeze would generate additional tax receipts of around £25 billion per year by 2027/28 — making it one of the largest tax raising measures in the UK's post-war history.
Who Is Most Affected?
Workers crossing the higher rate threshold for the first time face a sudden jump from 20% to 40% on their marginal earnings — made more likely by the freeze. Those earning just above the personal allowance who see the allowance erode in real terms are also impacted, paying more tax on a larger proportion of their income. At the top end, the additional rate threshold was lowered from £150,000 to £125,140 in April 2023 — this was an outright cut in the threshold, not just a freeze, bringing more high earners into the 45% band immediately.
- Salary sacrifice pension contributions reduce your gross taxable income directly, offsetting fiscal drag by keeping adjusted net income below key band boundaries. If you are approaching or have just crossed £50,270, a salary sacrifice arrangement could keep you in the basic rate band.
- Maximise ISA contributions each year. Sheltering investment income and gains inside an ISA means future returns from those assets add nothing to your taxable income — reducing the base on which fiscal drag operates.
- Check your PAYE tax code annually. HMRC may not always have the correct information about your income, allowances, or pension contributions. An incorrect tax code can result in overpaying or underpaying. Verify yours via the HMRC app or your personal tax account at gov.uk.
- Know your thresholds. Understanding exactly where your income sits relative to the band boundaries allows you to make informed decisions about pension contributions, gift aid, and salary sacrifice to manage your position.
- File self-assessment if required. Anyone with income above £100,000, or with complex tax affairs, is required to file a self-assessment return. This is the mechanism through which additional tax relief on pension contributions is claimed and adjusted net income is calculated.
How UK Tax Drag holds itself to account
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