It can be incredibly frustrating to work hard for a pay increase only to find that more of your income is pulled into the taxable range.

This can happen when tax thresholds are frozen for some time while your income rises, an effect known as “fiscal drag”.

As your earnings, pension withdrawals, or other taxable income increases, more of your money can fall above frozen thresholds, and you may pay more tax as a result.

Financial Planning Today reports that if current policies continue, the number of higher-rate Income Tax payers could double to about two-thirds of all taxpayers by 2075/76.

While this may seem distant, fiscal drag is already affecting a large portion of the country.

Continue reading to learn how the Income Tax threshold freeze works and how careful planning could help you manage its effect on your finances.

Income Tax thresholds have been frozen for several years now

The Personal Allowance stands at £12,570 in 2026/27, meaning you can typically earn up to this amount before you start paying Income Tax.

As of 2026/27, you would then pay:

• 20% on income between £12,571 and £50,270
• 40% on income between £50,271 and £125,140
• 45% on income above £125,140.

It’s also vital to note that your Personal Allowance is tapered by £1 for every £2 of adjusted net income above £100,000, meaning it effectively disappears entirely once you earn £125,140.

The Income Tax thresholds have remained in place for several years now.

In the 2021 Budget, the then-chancellor, Rishi Sunak, froze the Personal Allowance and higher-rate threshold from 2022/23 to 2025/26.

The freeze was extended to April 2028 in the 2022 Autumn Statement, while the additional-rate threshold was reduced from £150,000 to £125,140.

Then, in the 2025 Budget, the previous chancellor, Rachel Reeves, extended the freeze by another three years to April 2031.

Even though these thresholds remain the same, you could receive a salary increase during your career.

Since the freeze first came into effect in 2021, median annual earnings for full-time employees in the UK have risen from £31,285 to £39,039 in 2025, Statista reports.

This could mean you inadvertently move to a higher tax band sooner than expected, even if your income has only risen gradually.

Or, even if you don’t end up in a higher tax band, a greater proportion of your earnings might still be within the taxable range.

Fiscal drag could increase your tax bill without an official rate rise

While frozen thresholds might sound less impactful than an increase in Income Tax rates, they can still significantly affect your finances.

The House of Commons Library suggests that freezing Income Tax thresholds from 2022/23 to 2030/31 will raise an additional £55.5 billion in 2030/31.

Moreover, by 2030/31, the freeze could result in:

• 5.2 million more people paying Income Tax
• 4.8 million more paying higher-rate tax
• 600,000 more paying additional-rate tax.

If you’re still working, pay rises could gradually push more of your income into a higher band.

Alternatively, if you’re retired and drawing from your pension, taking larger taxable withdrawals could push part of your income into the 40% band, especially if you also receive money from other sources, such as rental property or investments.

Financial planning could help you manage the effects of fiscal drag

It’s important to consider that while you can’t control Income Tax thresholds, you may be able to reduce the effects that fiscal drag has on your finances.

One of the more practical ways to achieve this is by increasing your pension contributions.

Doing this can reduce your take-home pay, which could prevent you from creeping into a higher tax band.

Pension contributions might also be valuable if your income exceeds £100,000. This is because your Personal Allowance gradually reduces once your income rises above this level.

If you’re still in the middle of your career, it might also be worth considering salary sacrifice if your employer offers it.

This involves giving up part of your salary in exchange for non-cash benefits, most notably additional pension contributions.

This can reduce your taxable income and may also limit your National Insurance contributions. Just note that, from April 2029, the National Insurance exemption for employee contributions made through salary sacrifice is set to be capped at £2,000 a year, so it might be wise to take advantage while you can.

Ultimately, it can be challenging to understand your current tax position and how this might change in the coming years.

As such, it might be prudent to speak to a financial planner.

Ardent could help you review your income, pension contributions, and likely future tax bands. We can also use sophisticated cashflow modelling software to show how different decisions might affect your retirement income and long-term financial security.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, we can assure you that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate cashflow planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.