Answers · UK 2025/26
What is fiscal drag and how does it affect me?
Fiscal drag is when tax thresholds are frozen while wages rise with inflation, pulling more workers into higher tax bands — raising government revenue without any formal tax rise. The UK has experienced sustained fiscal drag since 2021, with the higher-rate threshold frozen at £50,270 and the Personal Allowance frozen at £12,570.
Full answer
Fiscal drag (sometimes called "bracket creep") is a form of passive tax rise. The government does not increase rates — it simply does not raise thresholds in line with wage growth, so as your salary goes up, a larger proportion falls into higher tax brackets. **UK fiscal drag since 2021:** - The higher-rate threshold has been frozen at £50,270 since April 2021 — with wage growth averaging 5–7% per year, hundreds of thousands of workers have crossed into the 40% band who never expected to. - The additional-rate threshold was temporarily cut from £150,000 to £125,140 in April 2023. - The Personal Allowance of £12,570 is frozen until April 2028. - The number of higher-rate taxpayers in the UK rose from approximately 4 million in 2021 to over 6 million in 2025 — primarily due to fiscal drag. **Real-world impact:** *Worker earning £35,000 in 2021 getting 5% annual pay rises:* - 2021: £35,000 — all basic-rate taxpayer. - 2026: £44,678 — still basic rate, but far less headroom. - 2029: £50,885 — crosses the higher-rate threshold, paying 40% on the last £615. *Worker already near £50,270:* - Each £1 of pay rise above £50,270 costs 40p Income Tax + 2p NI = 42p total. **What you can do:** Salary sacrifice into pension contributions reduces your taxable income, keeping more pay within the basic-rate band and potentially preserving your full Personal Allowance if you're near £100,000.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.