How frozen income tax thresholds quietly raise billions as pay rises with inflation — without a single tax rate going up.
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Fiscal drag happens when tax thresholds are frozen, or rise more slowly than incomes. As pay rises — whether through inflation or real growth — more of each person's income falls into taxable bands, and more people cross into higher bands. Government revenue rises automatically, even though no tax rate has changed.
Source: OBR, Implications of personal tax threshold freezes (Economic and fiscal outlook, November 2025).
| Band | Rate | Income |
|---|---|---|
| Personal allowance | 0% | Up to £12,570 |
| Basic rate | 20% | £12,571 – £50,270 |
| Higher rate | 40% | £50,271 – £125,140 |
| Allowance taper (effective) | 60% | £100,000 – £125,140: the allowance is withdrawn by £1 for every £2 earned |
| Additional rate | 45% | Over £125,140 |
Scotland sets its own income tax rates and bands; the personal allowance is UK-wide. Employee National Insurance (8% between £12,570 and £50,270, 2% above) is also frozen.
Salary £30,000. Taxable income = £30,000 − £12,570 = £17,430. Tax at 20% = £3,486 (11.6% of pay).
Salary rises 5% to £31,500 — no real pay rise. Taxable income = £18,930. Tax = £3,786 (12.0% of pay).
If the allowance had risen 5% to £13,199, tax would be £3,660. The freeze costs this worker £126 — and the gap grows every year.
Between £100,000 and £125,140, every extra £2 earned removes £1 of personal allowance. That £1 is then taxed at 40%, so each extra £100 earned costs £40 + £20 = £60 in tax. The £100,000 taper point has not changed since 2010, so fiscal drag pulls ever more doctors, head teachers and engineers into it. Many respond by paying more into pensions or cutting their hours.
The freeze was announced when inflation was close to 1%. When inflation surged above 10% in 2022, nominal wages rose quickly too, so far more income was pulled into tax than forecast. The faster pay rises, the more a fixed threshold "drags".
No rate rises and nothing new is announced each year — the government simply does nothing. Workers see their gross pay rise and often don't notice that a larger share is going in tax.
If real wages grow, incomes still rise relative to fixed thresholds, so more income is taxed at higher rates. Inflation makes the effect much bigger and faster, but real earnings growth on its own also causes drag.
Keeping only £40 of every extra £100 earned weakens the incentive to take on extra hours, a promotion or overtime. Some workers, such as NHS consultants, have been reported to turn down extra shifts or pay more into pensions to stay below £100,000.
Income tax thresholds first frozen in April 2021 will now stay at their current levels until April 2031, after two further extensions. Critics call it a "stealth tax" on working people: no rate has risen, yet the share of pay taken in tax keeps climbing.
The personal allowance remains £12,570 and the higher-rate threshold £50,270. As wages rise with inflation, millions are paying income tax for the first time, while others cross into the 40% band — without a single vote in Parliament to raise tax rates.
Supporters argue the freeze is a fairer way to repair the public finances than raising headline rates. Opponents say it is regressive in its effect on low earners and erodes trust because voters cannot see it happening.
Fiscal drag does not hit everyone equally. Drag the slider to choose how much prices have risen since thresholds were frozen, and see the extra tax at every salary compared with thresholds that kept pace.
No income tax, so no drag — but as pay rises, low earners are pulled into tax for the first time. That is where most of the 5.2 million new taxpayers come from.
The frozen allowance costs every basic-rate taxpayer the same cash sum. As a share of income, that hits lower earners harder — the regressive part of the freeze.
Watch the jumps: above the frozen higher-rate threshold the drag is several times larger, because income is pushed from 20% to 40% tax. The frozen £100,000 taper creates the largest cash hit of all.
Both pay 20% on the slice of income that a higher allowance would have protected. The size of that slice depends on how far the allowance has fallen behind prices, not on how much they earn, so the cash loss is identical. As a share of income, it is more than twice as large for the £20,000 earner.
Above £50,270, two frozen thresholds bite at once: the allowance and the higher-rate threshold. Income that would still have been taxed at 20% under indexed thresholds is now taxed at 40%.
National pay scales (nurses, teachers) and regional living costs differ. A frozen higher-rate threshold pulls in many London and South East professionals whose high nominal pay buys less, while low earners everywhere see the allowance shrink in real terms.
| Automatic indexation | Discretionary freezes |
|---|---|
| Transparent: any tax rise must be announced and voted for. | Flexible: governments can raise revenue quickly when needed. |
| Protects real incomes from inflation. | Avoids raising headline rates, which may be more damaging to confidence. |
| Reduces "bracket creep" into high marginal rates. | Revenue rises automatically when inflation is high — useful for controlling demand. |
| Since the Rooker–Wise amendment of 1977, the personal allowance is meant to rise with inflation by default — a freeze needs Parliament to override it. | Every Chancellor since 2021 has chosen to keep the freeze rather than raise rates. |
It avoids breaking pledges and the headline "income tax up", and the cost is spread thinly and invisibly across millions of people. Politically it is far less costly, even if the revenue raised is similar.
By reducing disposable incomes, it lowers consumer spending and demand-pull inflationary pressure. The Bank then does not need to raise interest rates as far to hit its 2% target.
Because households may not notice it, they may not cut spending in anticipation; and because the extra tax is spread thinly, it may come partly out of saving. On the other hand, it continues and grows every year the freeze lasts.
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