Millions of taxpayers are being dragged into higher tax bands due to frozen thresholds.
The number of income taxpayers rose for the sixth year in a row during the 2025/2026 tax year to 40 million, HMRC data shows.
That is an increase of 1.3 million income taxpayers or 3.4% on the previous tax year.
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Frozen tax thresholds mean that as workers’ wages increase with inflation, they will be dragged into higher tax bands – a process called fiscal drag.
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Income tax thresholds have been frozen since the 2022/23 tax year, after then-chancellor Rishi Sunak announced income tax brackets would not be adjusted yearly with inflation, as had been the norm, for four years.
Another Tory chancellor, Jeremy Hunt, subsequently extended the freeze for a further two years until the 2027/28 tax year.
In the 2025 Autumn Budget, Labour chancellor Rachel Reeves extended the freeze on income tax thresholds until the 2030/31 tax year.
By the time the extended freeze ends, income tax bands will have been the same for almost a decade, meaning millions of UK taxpayers will have paid thousands more in income tax than if thresholds had increased in line with inflation.
Claire Stinton, senior personal finance analyst for Hargreaves Lansdown, said: “You may have had a pay rise, job change, or taken on more hours in recent years, but not felt much difference in your monthly pay packet. That’s because more of your earnings are being swallowed by tax. And it’s not stopping anytime soon, with income tax thresholds due to be frozen until 2031, meaning more people will be dragged into the tax net and across tax bands in the coming years.
“The impact of crossing into a higher tax band goes beyond paying more income tax. It can also reduce your access to tax-free allowances and trigger higher tax rates on savings and investments, creating a ripple effect across your wider finances.”
We look at what ‘fiscal drag’ is, why successive governments have imposed it, and how much it is going to cost you.
What is fiscal drag?
Fiscal drag is simply the term used to describe what happens when a government does not adjust their income tax thresholds according to inflation and wage growth data.
This means that a higher number of taxpayers are dragged into paying tax for the first time, or at a higher rate, despite the purchasing power of their money not increasing at the same rate.
For example, in Autumn 2022 (when tax bands were first frozen), the tax-free personal allowance was £12,570.
According to the Bank of England’s inflation calculator, £12,570 in 2022 was worth around £14,650 in April 2026 when adjusting for inflation.
Normally, tax bands are adjusted for inflation, but, because they have been frozen, people today who earn the equivalent of £12,570 in 2022 (which is £14,650 in April 2026) are now paying tax on the £2,080difference that has occurred thanks to inflation.
Therefore, people are being dragged into paying tax despite not earning more money in real terms. Given the tax rate doesn’t rise, but the amount of tax raised increases, it is sometimes called a ‘stealth tax’.
How much will extended fiscal drag cost you by 2031?
With the freeze on income tax thresholds extended for an extra three years, taxpayers will be feeling the pain of fiscal drag even more profoundly – and higher earners will be bearing the brunt of the hit.
Taxpayers could be as much as £1,292 worse off thanks to the three year extension, research by AJ Bell suggests, compared to if the freeze ended in 2028 as planned.
But this will not be spread equally. Someone with a yearly income of £15,000 will only have to stomach an extra tax bill of £259 over the three year extension period.
Meanwhile someone on £47,000 will likely have to pay an extra £1,292 as their income is dragged into the higher rate of income tax.
How can you protect your money from fiscal drag?
While there aren’t many direct ways of avoiding fiscal drag apart from refusing to let your wages increase, there are some clever ways that you can mitigate its impact on your money.
First of all, it is important to get an idea of what your pay will look like for the year ahead so that you can plan accordingly.
Once you have established this, you can start to consider whether it is worth it for you to implement measures so your income stays below the tax bracket you would otherwise enter.
This can be in the form of increased pension contributions or looking into salary sacrifice. Those who are set to breach tax thresholds may also want to utilise the tax wrapper that comes with a cash ISA or stocks and shares ISA.
Make the most of your ISA allowance
Using the ISA tax wrapper can protect your savings and investment income from the taxman.
Stinton added: “Shelter your savings and investments in ISAs to ensure there is no tax due on interest, dividends, or growth. So should you find yourself going up a tax band, you’ll sidestep a potentially higher tax bill.”
This is especially important as the tax rates on savings and investment income rose in April 2026.
The maximum you can save in an ISA in any given tax year is currently £20,000, but this is set to change in April 2027. The overall £20,000 limit will remain, but you will only be able to save a maximum of £12,000 in a cash ISA. This new rule won’t apply to over-65s.
Put more into your pension
A way to reduce your taxable income is by putting more of your salary away into your pension.
Camilla Esmund, senior manager at interactive investor, notes that while this will leave you with less money in your pay packet at the end of each month, you will get upfront tax relief on your contributions – and you’ll still be able to enjoy the cash when you retire.
Consider salary sacrifice
Salary sacrifice offers another way for you to reduce your salary and therefore avoid the negative effects of fiscal drag.
Salary sacrifice could be used to put more in your pension, get childcare vouchers, buy a bike through the bike-to-work schemes, and could be spent on other technology schemes.
The amount you can salary sacrifice into a pension without having to pay National Insurance is set to change in April 2029 though when a £2,000 per year cap will be introduced.
Plan your income
Another way to avoid the worst of fiscal drag is to carefully plan when your income enters your account.
For example, you could opt for a fixed term savings account that pays interest annually, instead of an easy access option which pays more frequently. You could then have the fixed savings interest pay out once you’re in a lower tax bracket.
