You may be part of the many workers experiencing a profound erosion of their purchasing power; despite nominal wage growth, real incomes continue to stagnate. There are a lot of valid reasons why it feels that way; more specifically, the fact that we have seen high levels of inflation in the last 6 years compared to the decade that preceded it, no thanks to Covid, the Russia - Ukraine war and, ever since Trump's ascension to office, the variety of wars including a trade war and the recent outbreak of the US-Iran conflict in early 2026. Together, these geopolitical shocks have severely disrupted global supply chains and driven up commodity and basic goods prices.

All these have coincided with the UK's tax burden being at its highest in a while. The UK’s tax burden has surged to approximately 39% of GDP, its highest level since the post-war era. Rather than raising headline rates, a politically volatile move, Chancellor Rachel Reeves has relied on the stealth mechanism of "fiscal drag." By extending the freeze on income tax thresholds until 2031, the Treasury is quietly pulling millions of workers into higher tax brackets as nominal wages rise, securing substantial revenue without the public backlash of an explicit tax hike.

A bit of historical context

For most of the past fifty years, the UK operated under an explicit promise that thresholds would keep pace with inflation

That promise has a history worth telling. In 1977, two Labour backbenchers, Jeff Rooker and Audrey Wise, working with the Conservative Nigel Lawson, forced through an amendment to that year's Finance Act requiring personal tax allowances to rise automatically in line with inflation. Their argument was blunt: without indexation, inflation acts as an unauthorised, unintended and unknown increase in taxation, taxation by stealth. The point of the Rooker-Feldman Amendment was to bring that hidden increase into the open. From 1977 onwards there was a statutory obligation to raise allowances and bands by at least the rate of inflation, measured by the retail prices index, unless Parliament actively voted otherwise. The system's default setting was protection. To raise tax by freezing thresholds, a government had to choose to do so, in public.

That default still technically exists. The government's normal policy is to uprate many thresholds each year in line with inflation, a process known as uprating. But uprating policies are not always observed, and when thresholds are frozen there is an overall increase in tax paid without any actual increase in tax rates. What began as a guarantee has, in practice, become a lever a Chancellor can simply decline to pull.

The freeze, and the freeze on the freeze

The modern story starts in the March 2021 Budget. The then-Chancellor, Rishi Sunak, announced that the personal allowance and the higher rate threshold would be frozen for four years, from 2022/23 to 2025/26. He was candid about why: with the public finances battered by the pandemic, freezing thresholds would generate more revenue as earnings rose and more people were pushed over the lines. The pitch was that it felt painless. Nobody's take-home pay, he insisted, would be lower than it was.

Then the freeze was extended. In the 2022 Autumn Statement, Chancellor Jeremy Hunt pushed the end date out from April 2026 to April 2028, and in the same statement, lowered the additional rate threshold from £150,000 to £125,140, effective from April 2023. By that point, the OBR noted that the real value of the personal allowance was being dragged back towards its level a decade earlier.

For a moment it looked as if the squeeze might end. At the Autumn 2024 Budget, Chancellor Rachel Reeves said the freeze would not be extended beyond April 2028. One year later she changed course. At the Autumn Budget 2025, the government extended the freeze for three further years, from April 2028 to 2031, with provision made in the Finance Act 2026. The personal allowance, higher rate threshold, and additional rate threshold are now frozen at £12,570, £50,270, and £125,140, respectively, until 2030/31. A measure first sold as a temporary four-year fix will, by the time it lapses, have run for a decade.

How much does the government make from this?

When it was first announced, the freeze looked modest. The OBR initially estimated it would raise around £8 billion a year by 2025/26. Then inflation surged, and because fiscal drag feeds on the gap between frozen thresholds and rising prices, the yield climbed with it. By March 2023, the OBR estimated that the full set of frozen personal tax thresholds would raise £29.3 billion a year by 2027/28, the equivalent.

The latest figures are larger still. Following the extension to 2031, the OBR estimates that the freeze of income tax thresholds will raise over £55 billion in 2030/31 alone. The three-year extension announced in 2025 is itself expected to raise around £23 billion in total by 2030/31. It is the single largest reason the overall tax take is forecast to reach an all-time high of 38 per cent of GDP in 2030/31. A 4 pence rise in the basic rate would provoke headlines and rebellions. A frozen number does the same work in silence.

In simple terms

There are roughly 38 million people paying income tax in the UK. The freeze pulls more of them in, and pushes existing taxpayers up. When the policy was first scored in 2021, the effect looked small. The OBR expected the freeze to 2025/26 to bring about 1.3 million more people into income tax and one million more into the higher rate. The OBR now forecasts that between 2022/23 and 2030/31, 5.2 million additional people will have been brought into paying income tax, 4.8 million more will have moved into the 40 per cent higher rate, and 600,000 more into the 45 per cent additional rate. The clearest single statistic is this: the share of taxpayers paying the higher or additional rate is set to rise from 15 per cent in 2021/22 to 24 per cent in 2030/31.

Imagine your salary keeps pace with inflation each year, so in real terms you are standing still. If the thresholds rose with inflation too, your tax position would not change. Because they do not, every annual pay rise pushes a little more of your income above the £12,570 line and, for many, above the £50,270 line. Each pound that crosses from the 20 per cent band into the 40 per cent band is taxed twice as heavily as before. You feel no richer, yet you hand over a larger share. To see the scale of what has been lost, consider the allowance itself: the OBR estimates that, had it kept rising with inflation, the personal allowance would have reached roughly £17,500 by 2031, rather than the frozen £12,570, with the higher-rate threshold set at £70,000 rather than £50,270. The difference between those numbers is your tax bill.

What can you do to cushion the effect on you??

Fiscal drag rewards the passive and penalises the unprepared, which means that a household that plans deliberately can claw back a good deal of it, entirely legitimately. Here are some ways to reduce the impact on your income.

  1. Pay more into a pension. This is the most powerful lever most people have. Personal or workplace pension contributions reduce your taxable income, and for a higher earner that can mean dragging yourself back below the £50,270 line so that income is taxed at 20 per cent rather than 40 per cent. The relief matches your marginal rate, so a higher rate taxpayer effectively gets 40 per cent back. One important change to note: from April 2029 only the first £2,000 of pension contributions made each year through salary sacrifice will be free of National Insurance, so the National Insurance advantage of very large sacrifice arrangements is being capped, though the income tax relief on pensions remains.
  2. Defend the £100,000 cliff edge above all. If your income sits between £100,000 and £125,140, you lose £1 of personal allowance for every £2 earned, creating an effective marginal tax rate of around 60 per cent on that band. Worse, crossing £100,000 can cost parents of young children their entitlement to tax-free childcare and free childcare hours. A pension contribution that brings you back under £100,000 is often the highest return financial decision available to you. For anyone with a young family, this is a threshold to watch.
  3. Use your ISA allowance every year. You can shelter £20,000 a year inside an ISA, where interest, dividends and capital gains are entirely free of tax. As frozen thresholds and shrinking savings and dividend allowances pull more ordinary savers into tax on their interest and investment income, the ISA wrapper is doing more work than ever. Treat the annual allowance as use-it-or-lose-it.
  4. Share income across a couple. If one partner pays tax at a lower rate, moving income-producing assets, such as savings or shares, into their name uses their allowances and lower tax bands. Where one spouse earns below the personal allowance, the marriage allowance allows them to transfer £1,260 of it to a basic-rate-paying partner. These are small mechanics individually, but they add up.
  5. Give through Gift Aid, and claim the higher rate relief. Charitable donations made under Gift Aid extend your basic rate band, which, for a higher-rate taxpayer, reduces the amount of income exposed to 40 per cent tax. Many higher rate donors never reclaim the additional relief they are owed through their tax return.
  6. If you run a business, plan your own pay. For company owners, the mix of salary and dividends, the timing of dividends across tax years, employer pension contributions paid directly from the company, and bringing a spouse onto the payroll or share register where they genuinely contribute, are all routes to keep taxable income efficient. Employer pension contributions in particular sit outside the new salary-sacrifice National Insurance cap and remain a clean way to extract value.
  7. For higher earners with an appetite for risk, consider tax-advantaged investment, with eyes open. Venture Capital Trusts and the Enterprise Investment Scheme offer income tax relief, but note that VCT relief is being cut from 30 per cent to 20 per cent from April 2026, so the arithmetic is less generous than it was. These suit a minority of investors and carry real capital risk; they are a tool, not a default.
  8. Do the housekeeping. Check your tax code is correct, claim allowable professional subscriptions and work from home relief where eligible, and reclaim any higher rate pension relief due through self assessment. None of these is dramatic, but unclaimed reliefs are simply fiscal drag you have chosen to pay.

The deeper point is the one Rooker and Wise made in 1977. A tax rise that arrives by inflation rather than by vote is easy to impose and easy to ignore, which is precisely why it has lasted. You cannot change the policy from your kitchen table. But you can decide how much of your pay rise the freeze is allowed to quietly take.

This article is for general information and does not constitute personal financial or tax advice. Your own position depends on your circumstances, and you should consider professional advice before acting.

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