The Income Tax Threshold Freeze 2022-2028: Fiscal Drag and What It Costs You

The phrase "we are not raising tax rates" has been used to describe a freeze that is one of the largest stealth tax increases in modern UK history. By holding the Personal Allowance at £12,570 and the higher rate threshold at £50,270 from 2022 to 2028, the government has ensured that with every year of wage growth, more taxpayers pay more in income tax -- without a single rate increase. This is fiscal drag working at scale, and by 2028, it will have generated tens of billions of pounds in additional tax revenue relative to an inflation-linked baseline.

A brief history of income tax threshold uprating

For most of the period from 2010 to 2021, Personal Allowance increases were a political priority. The Liberal Democrats' campaign pledge to raise it to £10,000 was achieved by 2014/15. From there it increased year by year:

• 2018/19: £11,850.
• 2019/20: £12,500.
• 2020/21: £12,500.
• 2021/22: £12,570 (a small increase).
• 2022/23 onwards: £12,570 (frozen).

The higher rate threshold followed a similar path, rising to £50,270 in 2021/22 and then frozen.

By contrast, in the 1990s the UK saw a significant period of threshold freezes that similarly generated fiscal drag. The current freeze is longer and occurs against a backdrop of significantly higher inflation than that earlier episode.

What "frozen at £12,570" actually means in 2026/27

The Personal Allowance is the amount of income each person can earn before paying any income tax. In 2021/22, it had just risen to £12,570. Had HMRC uprated it with CPI each subsequent year:

• 2022/23 would have been approximately £13,250 (CPI was running at 9%+ in the period).
• Continuing forward, by 2026/27 the allowance would be in the region of £15,200 to £15,600 depending on the exact CPI series used.

Instead, it remains at £12,570. The difference -- roughly £2,700 to £3,000 -- is income on which every basic-rate taxpayer pays 20% income tax (and in some cases NI) that would otherwise be tax-free.

Annual extra income tax from frozen PA (basic rate taxpayer): approximately £540 to £600 per year compared to an inflation-linked alternative.

The frozen higher rate threshold: hitting the middle

The higher rate threshold at £50,270 is equally significant. With average UK earnings growing at 5-8% per year during 2022-2024, many employees who were comfortably in the basic rate band in 2021 have drifted into the higher rate band.

• A person earning £46,000 in 2021/22 would have remained a basic rate taxpayer throughout the freeze if their salary increased by 4% annually. By 2026/27 they might earn approximately £55,000 -- now £4,730 into higher rate territory.
• Without the freeze, the higher rate threshold might be approximately £57,000-£58,000. This person would still be a basic rate taxpayer.
• The extra higher-rate tax on approximately £8,000 of income (£55,000 - £47,000 effective threshold they cross) at 20% marginal (the difference between 40% higher rate and 20% basic rate): approximately £1,600 per year.

Cumulative impact across different income levels

The following illustrates the approximate cumulative extra income tax paid between 2022/23 and 2027/28 (six years) at different salary levels, compared to a scenario where thresholds had been uprated with average CPI:

£30,000 salary (assumed constant in real terms):

• Extra basic rate tax from frozen PA: ~£500/year.
• Cumulative over 6 years: approximately £3,000.

£50,000 salary:

• Extra basic rate tax from frozen PA: ~£600/year.
• Extra higher-rate tax from being over the frozen threshold for more years: variable.
• Cumulative: approximately £4,000-£6,000 depending on salary growth trajectory.

£80,000 salary:

• Already a higher rate taxpayer throughout; the main impact is the frozen PA.
• Extra 40% tax on the "missing" PA increase: ~£1,000-£1,200/year.
• Cumulative: approximately £6,000-£7,000.

Historical comparison: the 1990s freeze

The current freeze is not without precedent. In the early 1990s, the UK government similarly froze income tax allowances and thresholds. Between 1993 and 1997, real fiscal drag occurred as allowances did not keep pace with moderate inflation of 2-4%. However:

• That freeze lasted approximately 4 years.
• Inflation during the period was much lower (2-4% vs 10%+ in 2022-2023).
• The current freeze runs 6 years (2022-2028) against much higher cumulative inflation.

By the end of the current freeze in April 2028, the cumulative price level increase since April 2022 will be approximately 25-30%. Applying this to the 2022 Personal Allowance of £12,570 would give an inflation-adjusted equivalent of roughly £15,700. Every taxpayer will have had a real-terms allowance cut of approximately £3,130 compared to a fully indexed regime.

Scottish income tax: the same freeze with different rates

Scotland has its own income tax rates (set by the Scottish Parliament) but uses the same Personal Allowance as the rest of the UK. Scottish taxpayers therefore experience identical fiscal drag from the frozen Personal Allowance.

The Scottish higher rate threshold was also broadly aligned with the rest of the UK in recent years, meaning Scottish higher-rate taxpayers face similar fiscal drag on that boundary. However, Scotland's intermediate rate band (21% from £14,877 to £31,092 in 2026/27) means some Scots drift into the intermediate band rather than the UK's 20% basic rate -- the rate differences complicate direct comparison.

Mitigation strategies

Pension contributions: Every pound paid into a pension reduces your taxable income. For a higher rate taxpayer, this restores effective tax relief at 40% on contributions -- partially offsetting the fiscal drag effect.

Salary sacrifice: Reduces gross salary, reducing both income tax and NI. For those approaching the higher rate threshold, salary sacrifice into a pension can keep income within the basic rate band.

ISA allowance (£20,000): Investing in ISAs shelters future income and gains from tax. While this does not directly reduce the fiscal drag cost, it prevents further tax accumulation on investment returns.

Dividend allowance (£500) and CGT AEA (£3,000): Using these allowances annually ensures some income and gains are sheltered, making the overall tax position slightly more efficient.