Fiscal drag: how frozen tax thresholds quietly raise your bill

A pay rise is supposed to feel good. Then it lands, you check the payslip, and the extra money is smaller than the number in the letter. Part of that is normal: tax and National Insurance always take a slice. But over the last few years a quieter force has been at work too, and it has a name that sounds like a dull committee meeting and behaves like a pickpocket. It is called fiscal drag.

What fiscal drag actually is

Income tax in England, Wales and Northern Ireland is banded. You pay nothing on the first slice of income, the personal allowance, which sits at £12,570. You pay 20 per cent on income above that up to £50,270, then 40 per cent up to £125,140, then 45 per cent on anything higher. Those numbers are the thresholds, and normally they creep up a little each year to keep pace with prices and wages.

Since April 2021 they have not moved. They are frozen, and the freeze currently runs to April 2028. Wages, meanwhile, have carried on rising. When your pay goes up but the threshold stays still, more of your income crosses the line into a higher band. You are dragged into paying more tax without any rate ever going up. That is the whole trick, and it is why the freeze raises billions without a single Budget headline about a tax rise.

The number that surprises people

Say you earn £49,000 and get a 4 per cent rise, about £1,960. You might expect to keep most of it. But a chunk of that rise pushes you over £50,270, and every pound above that line is taxed at 40 per cent rather than 20, plus National Insurance on top. The headline rise looks generous. The take-home version is a good deal thinner.

The effect is sharpest around the £50,270 line, and brutal in one specific place. Between £100,000 and £125,140 the personal allowance is withdrawn by £1 for every £2 you earn. That withdrawal creates an effective tax rate of 60 per cent on that band, sometimes higher once other things are counted. If you want to see what a rise really adds rather than what it promises, put both salaries through the take-home pay calculator and compare the monthly figures side by side.

Why it matters more the longer it lasts

A freeze is gentle in year one and heavy by year seven. Each year of pay growth drags a few more people over each threshold, and once you are over it you stay over it. The Office for Budget Responsibility, which scores the public finances, has repeatedly described the threshold freeze as one of the largest revenue raisers of recent years, precisely because it compounds quietly while nobody has to vote for a higher rate.

It also catches people who never thought of themselves as high earners. The £50,270 higher-rate line was once firmly middle-of-the-road for a senior nurse, a teacher with responsibilities, or an engineer a few years into a career. Frozen in place while salaries climb, it now sweeps in far more of them, and with it comes the loss of things tied to that threshold, such as the tapering of Child Benefit for some households.

What you can actually do

You cannot unfreeze a threshold, but you can control where some of your income lands. Pension contributions are the classic lever: money paid into a pension comes off your taxable income, so a contribution can pull you back under a threshold and rescue that 40 or 60 per cent band. Salary sacrifice arrangements, where you swap gross pay for a pension contribution or another benefit, do the same job and trim the National Insurance bill as well. If your income is close to £100,000, this is worth real attention rather than a shrug.

None of this is a reason to turn down a pay rise. More money is more money, even after tax. The point is to see the rise clearly, so the gap between the letter and the payslip is a decision you understand rather than a nasty surprise. Work out the National Insurance side with the National Insurance calculator, check the income tax with the take-home tool, and you will know exactly what a jump in salary is worth before you spend it.

Figures are for the 2026 to 2027 tax year in England, Wales and Northern Ireland. Scotland sets its own income tax bands, which differ. This is general information, not financial advice; check current rates on GOV.UK.