How Frozen Income Tax Thresholds Affect Higher-Rate Taxpayers

Income tax thresholds apply to any income you receive above your tax-free personal allowance.

Currently, the personal allowance is £12,570 if you earn less than that, you won’t usually have to pay income tax.

If you’re a higher earner or you owe tax from a previous tax year, your personal allowance will decrease.

In the 2025 Autumn Budget, the government announced that the income tax thresholds will be frozen until 2031.

The current income tax rates are:

• Basic rate 20%: £12,571 to £50,270
• Higher rate 40%: £50,271 to £125,140
• Additional rate 45%: Over £125,140

If these thresholds had risen in line with inflation, they would be*

• Basic rate: £12,839.81 – £51,344.94
• Higher rate: £51,345.96 – £127,815.91
• Additional rate: Over £127,815.91

*according to the Bank of England Inflation Calculator at the time of writing, 22/07/2026.

Fiscal drag is when tax brackets are “frozen,” which results in people paying more tax even though tax rates don’t actually change.

This causes people to be “dragged” into a higher tax bracket.

The impact of fiscal drag depends on three core factors:

• Tax thresholds: the earnings at which different tax rates kick in
• Inflation: how much the cost of goods and services rise
• Wage growth: an increase in the amount of earnings you receive

Fiscal drag is sometimes called a “stealth tax.”

That’s because it allows the government to increase the amount of money collected from taxes without directly increasing tax rates themselves.

Some of the strategies to help reduce higher-rate income tax include:

• Maximising tax-efficient accounts: tax-efficient accounts, including a Cash ISA or Stocks and Shares ISA can help reduce the amount of tax you pay on savings and investment growth
• Claim pension tax relief: higher-rate taxpayers can claim back an additional 20% in pension tax relief
• Use your allowances: schemes like the marriage allowance could help you to increase how much income you can earn tax-free
• Speak with a specialist: tax can be complicated so it might be worth speaking with a tax specialist or financial adviser to get tailored help.