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 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.
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.
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.
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