Frozen Tax Thresholds Until 2031: How Fiscal Drag Quietly Shrinks Your Pay
By calculatemysalary.co.uk Editorial Team
UK income tax and NI thresholds are now frozen until 2031. Learn what fiscal drag is, how much it could cost you each year, and what steps you can take to protect your take-home pay.
You just got a pay rise. You should feel good about it. But when you look at your bank account, it doesn't feel as big as the headline number suggested. That's not your imagination — that's fiscal drag, and it's about to get worse. The government's frozen tax thresholds until 2031. We're talking six years of wages climbing while tax brackets stay put. That's the longest freeze in decades, and it quietly costs you money every single year.
What Is Fiscal Drag?
Here's how it works: thresholds don't move, but your salary does. So more of your income ends up in higher tax brackets. The rates aren't changing — 20% is still 20%, 40% is still 40% — but the government collects more money because more of you is being taxed harder. That's why it's called a stealth tax. Nobody announces it. Nobody votes on it. It just happens.
The Numbers
The personal allowance has been fixed at £12,570 since April 2021. If it had risen with CPI inflation, it would be about £15,000 now. That means basic-rate taxpayers pay income tax on about £2,430 more than they would otherwise — costing £486 extra per year. Higher-rate taxpayers lose about £972.
The higher-rate threshold at £50,270 matters just as much. Earnings growing 4–5% a year means people earning £48,000–£52,000 will cross into the 40% band for the first time. The OBR estimates over a million additional people will become higher-rate taxpayers before the freeze ends.
A Worked Example
Suppose you earned £49,000 in 2024/25 and received a 4% pay rise to £50,960 for 2025/26:
| Item | 2024/25 | 2025/26 |
|---|---|---|
| Gross salary | £49,000 | £50,960 |
| Income in basic-rate band | £36,430 | £37,700 (up to £50,270) |
| Income in higher-rate band | £0 | £690 |
| Extra income tax from crossing threshold | — | ~£138 at 40% on £690 |
Your gross pay rose by £1,960, but the move into the higher-rate band costs an extra £138 in income tax on top of the basic-rate tax on the rest. Factor in NI and the real increase in take-home pay is smaller than the headline figure suggests.
Who Is Hit Hardest?
- Earners around £50,270 who are pushed into the 40% band for the first time.
- Earners around £100,000 who lose their personal allowance, creating an effective ~60% marginal rate between £100,000 and £125,140.
- Everyone over time, because the freeze compounds year after year until 2031.
What You Can Actually Do About It
Pensions are your best weapon. Throw money into a pension — either salary sacrifice or a personal contribution — and it comes straight out of your taxable income. Miss a threshold by a few grand? Done. Lost your personal allowance at £100k? Pension contributions can get it back. This is the most effective thing you can do.
Check your tax code. Seriously. Log into your Personal Tax Account and verify it. If HMRC has it wrong, you overpay for months and nobody tells you.
Max out your ISA. You get £20,000 a year (for two more years anyway). Interest and dividends inside? Tax-free. Outside? Getting taxed more each year.
Use salary sacrifice if you can. Cycle-to-work, childcare, other benefits — if your employer offers them, they reduce your taxable income.
How to See the Impact on Your Pay
Use our UK salary calculator to compare your take-home pay at different salary levels. You can see exactly where the thresholds bite and how much pension contributions would save.
The Bigger Picture
Fiscal drag isn't one massive hit. It's a slow squeeze. Over six years to 2031, the government collects an extra £23 billion just by keeping thresholds frozen. That money's coming out of your household. But you're not helpless — pensions, ISAs, salary sacrifice — these actually work if you use them. The difference between ignoring this and acting on it could be hundreds of pounds a year.