HM Revenue & Customs (HMRC) is poised to collect an additional £700 from millions of UK households, all because tax thresholds have been frozen since April 6, 2021. The personal allowance — the amount of income you can earn before paying tax — has remained fixed at £12,570, despite inflation.
This phenomenon, known as fiscal drag, means that more of your income is effectively being taxed even though your earnings may not have increased in real terms. Basic-rate taxpayers at 20% are expected to lose up to £700 in the 2026/27 tax year alone due to the frozen personal allowance, a finding highlighted in recent research by AJ Bell.
By 2030/31, when inflation adjustments are expected to resume, the impact will magnify, with the cost rising to approximately £960 per basic-rate taxpayer. For higher-rate taxpayers (40%), the financial squeeze is even harsher. HMRC data shows that 29.4 million taxpayers, mostly paying the basic rate, comprise 80.1% of taxpayers but only contribute 29.9% of income tax revenue.
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Higher-rate taxpayers could face an additional £3,500 in tax payments for the 2026/27 tax year due to the thresholds remaining stagnant. The higher-rate tax threshold, which should be close to £70,000 if adjusted for inflation, will instead linger just above £50,000, increasing the tax burden.
Laura Suter, Director of Personal Finance at AJ Bell, commented: “The chancellor has doubled down on what was once the Conservatives’ brainchild: the income tax freeze is now firmly the ‘Reeves Freeze’, extended for another three years until 2031. The result is that every taxpayer in the country will see their wages quietly eroded by higher tax bills.”
She further emphasized, “Nothing can make up for the lost years where income tax bands have seen no inflationary uplift. The cumulative cost is staggering: the Office for Budget Responsibility estimates it will cost taxpayers £56 billion a year by 2029-30, around £1,330 per taxpayer on average.”
Andrew Prosser, Head of Investments at investment platform InvestEngine, suggests that increasing pension contributions is a smart way to reduce your tax bill, especially with pension tax relief benefits.
“For higher-rate taxpayers, a £20,000 pension contribution can effectively cost just £12,000 once government and personal tax relief are applied, making careful financial planning more important than ever,” said Prosser.
With tax thresholds remaining frozen, taxpayers need to be aware of how fiscal drag will quietly increase their tax bills and consider strategies to mitigate the impact.