Frozen Tax Thresholds Explained: Why Your Pay Rise Might Leave You Worse Off

Getting a pay rise should feel like a win. Yet many people in the UK are finding that a bigger salary does not leave them much better off, and some even end up worse. The culprit has a dull name but a real bite: fiscal drag. It is sometimes called a stealth tax, because the government collects more from you without ever putting up a single tax rate.

Here is what is going on. The points at which you start paying tax, called thresholds, have been frozen and will stay frozen until 2031. When your pay rises with inflation but the thresholds stay still, you get dragged into paying more tax. Let us break down exactly how that works and, more importantly, what you can do about it.

The tax bands, in plain English

Income tax in England, Wales and Northern Ireland is charged in slices. Each slice has its own rate.

• The personal allowance is £12,570. You pay no income tax on earnings up to this amount.
• The basic rate of 20% applies to income above the personal allowance up to £50,270.
• The higher rate of 40% applies to income above £50,270 up to £125,140.
• The additional rate of 45% applies to income above £125,140.

You also pay National Insurance (NI), which is a separate charge on your earnings that helps pay for things like the state pension. It kicks in at its own threshold, which is also frozen.

What does "frozen thresholds" actually mean?

Normally, tax thresholds would creep up a little each year to keep pace with rising prices. If wages and prices go up by, say, 4%, the thresholds would ideally go up by roughly 4% too. That way the tax system stays fair as the cost of everything rises.

But the thresholds are not moving. They are frozen in place until 2031. Prices and wages, meanwhile, keep climbing. So every year that gap grows, and more of your money falls into a taxed slice that it would not have reached before.

How freezing plus inflation equals more tax

This is the heart of fiscal drag. You do not need a rate rise for your tax bill to go up. You just need your pay to rise while the thresholds stand still.

Imagine you earn £49,000. You are a basic-rate taxpayer, comfortably below the £50,270 higher-rate line. Now imagine you get a 4% pay rise to keep up with inflation. Your new salary is £50,960. On paper you have more money. But you have now crossed the £50,270 line, so the slice above it is taxed at 40% instead of 20%.

The painful part is that this pay rise only matched inflation. Your buying power has not really improved. Yet the taxman now takes a bigger share. If the threshold had risen with prices, you would have stayed safely in the basic-rate band. That is fiscal drag in one clear example.

The same trap catches people at the bottom too. Someone who was earning below the personal allowance and pays no tax can be dragged into paying the basic rate simply because their wages rose while £12,570 stayed frozen.

The nasty £100,000 trap

There is one especially sharp version of fiscal drag worth flagging. Once your income passes £100,000, you start losing your personal allowance. For every £2 you earn above £100,000, you lose £1 of your tax-free allowance, until it disappears completely at £125,140. This creates a strange zone where each extra pound is effectively taxed at a very high rate. Frozen thresholds mean more people are being dragged into this trap over time. If your pay is heading towards £100,000, pension contributions can be a powerful way to keep your taxable income below the line.

So what can you actually do about it?

You cannot change the thresholds, but you can be smart about how much of your income is exposed to tax. Here are the main tools.

1. Pay into a pension through salary sacrifice

Salary sacrifice means you agree to give up a slice of your salary and your employer pays it straight into your pension instead. Because that money never counts as your taxable pay, it can pull you back under a threshold. If a pay rise pushes you just over £50,270, sacrificing the extra into your pension can keep you in the basic-rate band and boost your retirement savings at the same time. It is one of the neatest ways to soften fiscal drag.

2. Use your ISA allowance

Interest and investment growth inside an ISA are tax-free. Sheltering savings this way keeps more money out of the taxman's reach. It is worth knowing the ISA rules are changing soon, so read our guide on the £12,000 cash ISA cut to see how the allowances are shifting.

3. Claim the marriage allowance

If one partner earns below the personal allowance and the other is a basic-rate taxpayer, the lower earner can transfer part of their unused allowance to the higher earner. This marriage allowance can trim a couple's overall tax bill and is often missed.

4. Check your tax code

Your tax code tells your employer how much tax-free pay you get. If it is wrong, you could be paying too much for months without noticing. Check it on your payslip or through your online tax account, and query anything that looks off. Tax code errors are surprisingly common, especially after a job change, a pay rise, or when you have more than one source of income, so it is worth a quick look at least once a year.

5. Use Gift Aid on donations

If you are a higher-rate taxpayer and you give to charity, Gift Aid lets you claim back the difference between the basic and higher rate on your donations through your tax return. It is a small but real way to reduce what you owe.

6. Do not turn down a pay rise

It is worth saying clearly: crossing a threshold does not mean you take home less overall. Only the slice of income above the threshold is taxed at the higher rate, not your whole salary. So a pay rise still leaves you better off in pounds, just not by as much as you might hope. People sometimes fear that earning a little more will make them worse off. Except in a few sharp traps like the £100,000 zone, that is a myth. More gross pay almost always means more take-home pay. Fiscal drag simply means the taxman keeps a growing share of the extra.

7. Watch the savings and dividend allowances too

Fiscal drag does not only touch your wages. If you hold savings or shares outside a tax-free wrapper, the allowances on that income have been squeezed as well. The dividend allowance, which is the amount you can earn from company shares tax-free each year, has been cut sharply in recent years, so more small investors now owe tax on their dividends. The tax-free buffer on savings interest has stayed flat while interest rates have climbed, dragging ordinary savers into tax too. Sheltering savings and investments inside an ISA is the cleanest way to keep this income out of the taxman's reach entirely.

How much extra could this cost you? A closer look

It helps to see the numbers side by side. Take a worker who moves from £50,000 to £52,000 after a pay rise. The £2,000 rise sits above the £50,270 higher-rate line, so most of it is taxed at 40% rather than 20%. On the slice above the threshold, that is double the tax rate they would have paid a year earlier on the very same money.

Now imagine that same worker gets a similar rise every year for several years running. Each rise pushes a slightly larger portion of their income into the 40% band, because the £50,270 line never moves. Over five or six years, the total extra tax paid, compared with a world where the threshold had risen with prices, can add up to a meaningful sum. None of it comes from a rate change. It all comes from the freeze. That is why fiscal drag is sometimes described as the tax rise nobody announced.

Fiscal drag hits families and pensioners too

It is not only workers on a salary who get caught. The High Income Child Benefit Charge starts to claw back Child Benefit once one parent's income passes a set threshold, and because that threshold moves slowly, rising pay drags more families into losing part of their benefit. Pensioners feel it as well. The personal allowance is frozen for everyone, so as the state pension rises each year under the triple lock, more pensioners find part of their income creeping towards the tax-paying zone. Fiscal drag is a broad effect that reaches almost every corner of household finances, not just the payslip.

A quick worked example over time

To see how the drift adds up, picture someone earning £45,000 today who gets a 3% pay rise each year just to keep up with prices. After a few years their salary drifts towards and then past the £50,270 higher-rate line. Each year, a slightly larger slice of their income is taxed. Their spending power has barely moved, because prices rose too, yet their tax bill has climbed steadily. Nobody voted for a tax rise, and no rate changed on paper. That silent creep is exactly why fiscal drag raises so much money without much fuss.

Why this matters more each year

Because the freeze runs all the way to 2031, fiscal drag is not a one-off. Its effect compounds. Every annual pay rise, even a modest one, nudges a few more people over the edges of the bands. The Office for Budget Responsibility has long expected this to raise huge sums for the Treasury precisely because no rate change is needed and few people notice it happening.

That is why staying aware is so useful. You may not feel a single dramatic jump, but the slow drift adds up over years.

The takeaway

Fiscal drag is a quiet tax rise dressed up as no change at all. Frozen thresholds until 2031, combined with rising pay, mean more of your income gets taxed and taxed at higher rates over time. You cannot stop the freeze, but you can fight back sensibly: pump extra into your pension, especially through salary sacrifice, use your ISA and marriage allowances, check your tax code is right, and claim Gift Aid if it applies. Small, steady moves keep more of your pay rise in your own pocket.

This is general information and not personal tax advice. Everyone's situation is different, so check your own figures or speak to a qualified adviser before acting.