Frozen Tax Thresholds 2026/27: How Fiscal Drag Is Costing UK Workers

Quick answer

In 2026/27 the UK's income tax thresholds remain exactly where they were in 2021/22. The Personal Allowance is £12,570, the basic-rate band runs from £12,571 to £50,270, and the higher-rate threshold sits at £50,270. These figures have not moved a single pound since April 2021 and are legislated to stay put until April 2028.

Meanwhile, wages have risen significantly. ONS Average Weekly Earnings data showed nominal wages up approximately 5.6% in the year to September 2025, with real wages (after CPI of around 2.7%) rising roughly 2.8%. The result is that millions of workers are paying more tax in cash terms — and more as a share of their real income — without any announcement of a rate rise. This is fiscal drag in action.

What fiscal drag actually means

Fiscal drag is the mechanism by which a government raises tax revenue without raising tax rates. The logic is straightforward:

1. Wages tend to rise over time, partly through inflation and partly through real productivity gains.
2. If tax thresholds stay fixed in cash terms, the proportion of each salary that falls above the tax-free allowance grows every year.
3. Workers who were comfortably in the basic-rate band edge towards — or cross — the higher-rate threshold.
4. The Treasury collects more without any politician voting for higher rates.

The OBR estimated in its 2024 forecasts that the combined freeze on the Personal Allowance and higher-rate threshold would raise approximately £42 billion per year by 2028/29 — one of the largest single revenue-raising policies in modern UK history, delivered entirely in silence.

The key distinction is between nominal wages and real wages. A worker earning £48,000 in 2021 was £2,270 below the higher-rate threshold. If their salary has risen to £50,500 in 2026/27 — a 5.2% rise that merely kept pace with cumulative inflation — they are now £230 into the higher-rate band, paying 40% instead of 20% on that slice. Their purchasing power is no higher, but their tax bill is substantially bigger.

The exact numbers: how frozen thresholds compare to inflation

CPI inflation since April 2021 has been unusually high. The cumulative rise from April 2021 to early 2026 is approximately 21%. Applied to the frozen thresholds, this is what the allowances would look like had they kept pace:

In other words, the higher-rate threshold in 2026/27 is worth only about £41,500 in 2021 purchasing power — meaning workers who have only kept pace with inflation are being taxed as if they are meaningfully richer.

The NI Primary Threshold is separately worth noting: it was aligned with the Personal Allowance in April 2022 (a policy change that benefited lower earners) and has remained frozen at £12,570 ever since. The freeze therefore bites twice on income below £12,570: both income tax and NI are affected.

6.1 million higher-rate taxpayers — how the number grew

In 2019/20, approximately 4.2 million people paid income tax at the higher rate (40%) or above. By 2026/27, the IFS estimates that figure has risen to approximately 6.1 million — an increase of nearly two million people who are paying 40% on at least some of their income.

That increase has not come from a sudden surge in highly-paid jobs. The threshold was £50,000 in 2019/20, rose marginally to £50,270 in 2021/22, and has been frozen there ever since. Median UK full-time earnings were roughly £34,000 in 2021; by 2025/26 they had risen to approximately £38,000. Workers near the boundary have steadily crossed it.

The composition of those 6.1 million also matters:

• Many are teachers, nurses, police officers and public-sector workers whose incremental pay rises have finally crossed the frozen line after years of below-inflation settlements.
• Others are private-sector workers who received inflation-matching rises in 2022 and 2023 when CPI peaked near 11%.
• Some are self-employed whose profits have grown with pricing power, without any real increase in their standard of living.

None of them voted to be higher-rate taxpayers. The threshold simply never moved to accommodate reality.

The National Living Wage squeeze

The National Living Wage rose from £12.21 per hour in 2025/26 to £12.71 per hour from April 2026 — a 4.1% increase. A full-time worker on NLW (37.5 hours per week) now earns approximately £24,783 per year.

The Personal Allowance remains at £12,570. That means:

• Taxable income: £24,783 − £12,570 = £12,213
• Income tax at 20%: £2,443
• NI at 8% on earnings above £12,570: £977
• Total tax and NI: £3,420
• Take-home: £21,363/year or £1,780/month

Had the Personal Allowance risen with inflation to around £15,200, the same NLW worker would pay:

• Taxable income: £24,783 − £15,200 = £9,583
• Income tax at 20%: £1,917
• NI at 8%: £977 (NI threshold unchanged at £12,570 in this comparison)
• Total: £2,894
• Take-home: £21,889/year — a gain of £526/year or £44/month

For someone earning minimum wage, that £44 per month is not trivial. It is roughly equivalent to a week's worth of groceries or two months of a streaming subscription. The freeze is disproportionately felt the closer workers are to the threshold floor.

Worked example: the £50,000 earner before and after the freeze

Consider a worker earning £50,000 in England.

2020/21 (before the freeze, pre-2021 thresholds):

• Personal Allowance: £12,500
• Higher-rate threshold: £50,000
• Basic-rate taxable income: £50,000 − £12,500 = £37,500
• Tax at 20%: £7,500
• Higher-rate taxable income: £0 (exactly at the threshold)
• Total income tax: £7,500
• NI (primary threshold then £9,500): approximately £4,260
• Total: £11,760

2026/27 (after the freeze):

• Personal Allowance: £12,570
• Higher-rate threshold: £50,270
• Basic-rate taxable income: £50,270 − £12,570 = £37,700 → tax at 20% = £7,540
• Higher-rate taxable income: £50,000 − £50,270 = £0 (just below, so no higher rate yet)
• Total income tax: £7,540
• NI (threshold £12,570): £50,000 − £12,570 = £37,430 at 8% = £2,994
• Total: £10,534

Note that in this specific case the £50,000 earner is not yet in the higher-rate band and the NI rate reduction from April 2024 (from 12% to 8%) has reduced the overall burden. The freeze harm for this salary level is modest in isolation. The real pain is for workers who crossed the higher-rate line after 2021 purely because wages rose.

Now consider the same worker earning £55,000 in 2026/27:

• Basic-rate band: £12,571 to £50,270 → 20% on £37,700 = £7,540
• Higher-rate band: £50,271 to £55,000 → 40% on £4,730 = £1,892
• Total income tax: £9,432
• NI: £12,571 to £50,270 at 8% = £3,016; £50,271 to £55,000 at 2% = £95 → NI = £3,111
• Total deductions: £12,543
• Take-home: £42,457

If the higher-rate threshold had risen with inflation to approximately £60,827, this worker would remain in the basic-rate band entirely:

• Income tax: 20% × (£55,000 − £12,570) = 20% × £42,430 = £8,486
• Saving versus frozen threshold: £946/year

That is the fiscal drag cost for a £55,000 earner: roughly £946 per year in extra income tax on top of any NI impact.

Scotland: the partial exception

Scotland runs its own income tax bands above the Personal Allowance (which remains a UK-wide figure set at Westminster). The Scottish Government's 2026/27 Budget made a significant departure from the rest of the UK:

• Starter rate threshold (19% band top): uprated by 7.4% to approximately £15,397
• Basic rate threshold (20% band top): uprated by 7.4% to approximately £28,667

However, the upper bands were not similarly uprated:

The freeze on the Higher rate threshold at £43,663 means Scottish workers cross into the 42% band at a level that is both lower in nominal terms than the rUK higher-rate threshold (£50,270) and has not risen with inflation. A Scottish nurse on £45,000 pays 42% on £1,337 of their salary; their equivalent colleague in England and Wales pays 40% on nothing below £50,270.

The 7.4% uprating of the lower bands does benefit lower earners and partially offsets fiscal drag at those income levels. However, for the majority of Scottish workers in the Intermediate and above bands, the freeze effect is the same as or worse than in the rest of the UK.

How to reduce the impact: practical mitigation

You cannot unfreeze the thresholds. But you can reduce your adjusted net income so that less of it sits in the taxed zone, or above a rate threshold.

Pension salary sacrifice

This is the most powerful tool for most employees. Under salary sacrifice, you give up gross pay in exchange for an employer pension contribution of equal value. The contribution never appears in your taxable pay, which means:

• Income tax is saved at your marginal rate (20%, 40% or even 60% in the personal allowance taper zone).
• NI is also saved — the employee NI saving is 8% in the basic-rate band, 2% above the upper earnings limit.
• Your employer saves secondary NI (13.8%) and may pass some of that back as an enhanced contribution.

A higher-rate earner on £55,000 who salary-sacrifices £4,730 per year (the slice above the £50,270 threshold) saves £1,892 in income tax + £95 in NI = £1,987, at a net personal cost of only £2,743 in reduced take-home. The pension receives the full £4,730. That is an immediate 72% return before any investment growth.

Gift Aid

For higher-rate and additional-rate taxpayers, Gift Aid donations are tax-efficient. The charity claims 25p of Gift Aid for every £1 donated. You then claim the difference between your marginal rate and the basic rate through Self Assessment:

• A 40% taxpayer donating £100 net (grossed up to £125) claims 20% of £125 = £25 back via Self Assessment.
• A 45% taxpayer claims 25% of £125 = £31.25 back.

This does not reduce your income per se, but it reduces your tax liability and, in the right circumstances, can shift adjusted net income below a threshold.

ISA maximisation

The ISA annual allowance is £20,000 in 2026/27. Interest, dividends and gains inside an ISA generate no taxable income. As savings rates have remained above 4% on many cash ISAs, a fully funded ISA now shields up to £800 of interest income per year from tax — interest that, outside an ISA, could push a basic-rate taxpayer above their £1,000 Personal Savings Allowance and into the taxed zone.

Salary-sacrifice benefits

Besides pensions, other salary-sacrifice arrangements reduce gross pay:

• Cycle to Work: up to approximately £3,000 of bike cost can be taken via salary sacrifice over 12–18 months.
• Electric vehicle salary sacrifice: monthly lease costs come from pre-tax pay; BIK on pure EVs is only 3% in 2026/27, making the total cost significantly lower than a personal lease.
• Childcare vouchers (legacy scheme, closed to new entrants) and Tax-Free Childcare (not salary sacrifice but reduces net childcare cost by up to 20%).

Each of these reduces the gross pay figure on which your tax code operates, cutting the drag effect directly.

What happens when the freeze ends in 2028

The legislated end date for the threshold freeze is 5 April 2028 — the end of the 2027/28 tax year. From 2028/29 onward, the default under Finance Act is to uprate allowances in line with the September CPI figure from the preceding year (the "statutory indexation" mechanism), unless a Chancellor announces otherwise.

Two scenarios are realistic:

Scenario A — Full unfreeze. From April 2028, thresholds rise with September 2027 CPI. If CPI runs at 2.5% that year, the Personal Allowance would rise by roughly £314 to approximately £12,884 and the higher-rate threshold by approximately £1,257 to £51,527. This is a modest one-year catch-up; it does not undo seven years of drag.

Scenario B — Freeze extended. The OBR's forecasts show around £42 billion of annual revenue generated by the freeze. Any Chancellor needing fiscal space could extend by another one to three years. With either party in government, this is a credible risk — the revenue is too large to sacrifice easily.

A third possibility — a one-off catch-up uplift to restore real-terms value — would be expensive and has not been signalled by any party. The most likely outcome is a modest annual uprating from 2028, with the cumulative real-terms loss since 2021 never fully recovered.

Try the calculator

To see exactly how the frozen thresholds are shaping your 2026/27 tax bill — including which band your salary falls in and how a pension contribution would move the dial — use the income tax calculator below.

For a full breakdown of take-home pay including NI, student loan and pension:

Sources

• HMRC: Income Tax rates and Personal Allowances 2026/27
• Office for Budget Responsibility: Economic and Fiscal Outlook — revenue impact of threshold freeze
• Office for National Statistics: Average Weekly Earnings, September 2025; CPI series
• Institute for Fiscal Studies: Higher-rate taxpayer numbers estimates, 2024–26
• Scottish Government: Scottish Budget 2026/27 — income tax band changes
• Low Pay Commission: National Living Wage rates from April 2026