If your pay rose 5% last year, you might assume you are 5% better off. You are not. Because the UK personal allowance and higher rate threshold have been frozen since 2021, more of every pay rise is taxed at higher rates than it would have been if thresholds had increased with inflation. This phenomenon is called fiscal drag, and it is now the single biggest source of personal tax increases in the UK.
The frozen thresholds
- Personal allowance: £12,570 — frozen since 2021/22.
- Higher rate threshold: £50,270 — frozen since 2021/22.
- Additional rate threshold: £125,140 — reduced from £150,000 in April 2023.
- Personal allowance taper: reduces by £1 for every £2 of income above £100,000, fully gone at £125,140.
The freeze was originally legislated to last until 2026 and has since been extended to April 2028. With inflation since 2021 running well into double digits cumulatively, the real value of these thresholds has fallen sharply.
The £100,000 cliff edge
The personal allowance taper between £100,000 and £125,140 creates an effective marginal income tax rate of 60% (you lose £1 of personal allowance for every £2 of earnings, and that £1 is then taxed at 40%). With student loan repayments and the loss of childcare entitlements stacked on top, real marginal rates inside this band can exceed 70%.
For employees earning between £100,000 and £125,140, pension salary sacrifice is the single most effective response. Reducing taxable pay below £100,000 restores the full personal allowance, saves NIC, and grows retirement assets. This is now the most common high-income planning conversation we have with employed clients.
The "child benefit" middle ground
The High Income Child Benefit Charge (HICBC) now applies between £60,000 and £80,000 (raised from the previous £50,000 to £60,000 band). Within that range, HICBC effectively claws back child benefit at 1% per £200 of income, adding to the marginal rate. Couples earning £55,000 each can keep full child benefit; a couple where one earns £80,000 and the other £30,000 loses it all. The unfairness has been widely criticised — but it is the rule.
How fiscal drag affects each tax band
Basic-rate taxpayers
Pay rises that should have stayed below the personal allowance now sit above it — meaning more of any pay rise is taxed at 20% plus 8% NIC. A worker on £18,000 in 2021 was a basic-rate taxpayer with most of their earnings below the personal allowance; today, that same worker (now on perhaps £21,000 after inflationary rises) pays substantially more income tax in real terms.
Higher-rate taxpayers
The biggest impact is at the £50,270 threshold. Pay rises that should have stayed below the higher rate band are now taxed at 40%. The number of higher-rate taxpayers has grown by millions since the freeze began.
Additional-rate taxpayers
The reduction from £150,000 to £125,140 brought several hundred thousand additional taxpayers into the 45% band overnight. Combined with the personal allowance taper, the planning value of pension contributions and charitable giving is at an all-time high in this band.
Responses that still work
- Pension contributions — extend the basic rate band, restore the personal allowance, reduce HICBC.
- Gift Aid donations — extend the basic rate band by 1.25 times the gift, with the same restorative effects.
- Salary sacrifice — particularly for cycle-to-work, electric cars (1% BIK rates in 2025/26 rising slightly), and pensions.
- EIS / SEIS / VCT — provide 30% / 50% / 30% income tax relief respectively, useful for additional-rate taxpayers with appetite for risk.
- ISAs — still £20,000 per year, sheltering future income and gains.
The Scottish dimension
Scottish income tax bands and rates diverge from the rest of the UK. The Scottish higher rate (42%) starts at a lower threshold (£43,663 in 2026/27), the advanced rate (45%) starts at £75,000, and the top rate is 48% above £125,140. Cross-border workers and those moving between Scotland and elsewhere need careful residence analysis.
Why this matters for planning
Fiscal drag is not a one-off event — it compounds every year. Each pay rise without a threshold rise pulls more income into higher bands. Personal tax planning is now a multi-year exercise, not a year-end scramble.
Our self assessment team builds threshold-aware planning into every return, modelling pension contributions and Gift Aid in real time so clients see the marginal impact before they commit. Book a personal tax review if you are anywhere near £50,270, £60,000, £100,000, or £125,140 — these are the bands where small actions create disproportionate savings.