Frozen Tax Thresholds and Fiscal Drag: The Silent Tax Rise

One of the most significant and least understood elements of UK taxation in recent years is the impact of frozen tax thresholds—a mechanism that quietly increases people’s tax bills without raising tax rates.

In 2021, the UK government announced a freeze on personal tax allowances and thresholds until 2026, later extended to 2028. At first glance, this might seem harmless. After all, the basic and higher rate bands remain unchanged. However, when inflation and rising wages are taken into account, the result is what’s known as fiscal drag.

Fiscal drag occurs when people are pushed into higher tax bands simply because their income has increased with inflation—not because they’re genuinely earning more in real terms. For example, someone getting a routine pay rise to keep up with the cost of living may suddenly find themselves paying more tax, or even entering the higher-rate tax band.

This stealthy form of taxation is generating billions in extra revenue for the Treasury. According to the Office for Budget Responsibility, it is one of the largest single contributors to the UK’s increased tax take. Unfortunately, it disproportionately affects middle-income earners and can disincentivise work, particularly for those nearing the higher-rate threshold.

Taxpayers can respond by making full use of pension contributions, ISAs, and charitable giving to reduce taxable income. But ultimately, awareness is key: understanding how fiscal drag works allows individuals to better plan and manage their tax liabilities in the years ahead.