If you’ve had a pay rise but feel no better off, you’re not imagining it. Income tax thresholds have been frozen for years, so as wages rise, more of your income is taxed at higher rates. It’s called fiscal drag, and it’s one of the biggest quiet tax rises in recent history.
This is general information, not tax advice. Figures are for England, Wales and Northern Ireland; Scotland’s bands differ.
How fiscal drag works
The Personal Allowance, the income you can earn tax-free, has been stuck at £12,570 since 2021/22, and the thresholds have been frozen until 2031. The higher-rate threshold of £50,270 is frozen too.
In a normal year, thresholds would rise with inflation. When they don’t:
- A pay rise that just keeps up with prices still increases your tax bill
- More of your income crosses into the 40% band
- People who were never higher-rate taxpayers become one
Why crossing £50,270 matters
It’s not just the jump from 20% to 40%. Crossing the higher-rate threshold can also:
- Halve your tax-free savings interest (the Personal Savings Allowance falls from £1,000 to £500)
- Increase the tax rate on dividends and capital gains
- Affect Child Benefit once income passes the High Income Child Benefit Charge threshold
The £100,000 trap
Once your adjusted net income goes over £100,000, you lose £1 of your £12,570 Personal Allowance for every £2 above it. By £125,140, it’s gone. On income in that band, you effectively pay around 60% tax, plus National Insurance. For parents, going over £100,000 can also mean losing tax-free childcare.
Good to know: “Adjusted net income” is reduced by pension contributions and Gift Aid donations. That’s why these are the main tools for managing the trap.
Ways to keep more of your pay
- Pay more into your pension. Contributions reduce your taxable income and get tax relief at your highest rate. Higher-rate taxpayers with relief-at-source pensions must claim the extra relief.
- Use salary sacrifice if it’s offered. You save Income Tax and National Insurance on the amount you sacrifice. From April 2029, the National Insurance saving is due to be limited to the first £2,000 a year.
- Use your ISA allowance. Interest, dividends and gains inside an ISA are tax-free and don’t count towards your income.
- Share savings with a lower-earning partner so interest falls within their allowances, and check whether you qualify for Marriage Allowance.
- Consider workplace benefits such as electric car salary sacrifice schemes or cycle-to-work, which can reduce taxable pay.
- Check your tax code every year in your HMRC account.
Measure it, so you can manage it
Look at your latest payslip and your P60. Note your total taxable pay and how close you are to £50,270 or £100,000. If a pay rise or bonus will push you over a threshold, plan your pension contributions before the tax year ends on 5 April, not after.
The short version
Frozen tax thresholds mean that as wages rise, more of your income is taxed at higher rates: fiscal drag. The £12,570 Personal Allowance and £50,270 higher-rate threshold are frozen until 2031, and income between £100,000 and £125,140 faces an effective 60% rate. Pension contributions, salary sacrifice and ISAs are your best tools. Check how close you are to each threshold, and plan before the tax year ends.
Common questions
What is fiscal drag?
It's when tax thresholds stay frozen while wages rise, so more of people's income is taxed, and more people move into higher tax bands, without any official tax rate rise.
How long are the thresholds frozen?
The Personal Allowance of £12,570 and the higher-rate threshold have been frozen since 2021/22, and the freeze has been extended to 2031.
What is the 60% tax trap?
Once your adjusted net income goes over £100,000, you lose £1 of your Personal Allowance for every £2 above it. Between £100,000 and £125,140, that creates an effective marginal tax rate of around 60%, before National Insurance.
Does the higher-rate threshold differ in Scotland?
Yes. Scotland sets its own Income Tax bands and rates, so the numbers differ. The principle of fiscal drag still applies.
This article is general information, not personal financial advice. Your situation is your own, so check the details for yourself or speak to a regulated adviser before making big decisions. Where investments are mentioned, their value can go down as well as up.
