Income tax rates have not gone up, yet many people are paying more income tax each year. The reason is fiscal drag: the main thresholds have been frozen since April 2022, and the November 2025 Budget extended the freeze to April 2031. Here is how it works in 2026/27 and what you can do about it.
What Is Fiscal Drag?
Fiscal drag happens when tax thresholds stay fixed while incomes rise. Each pay rise pushes more of your income into tax, or into a higher band, even though the rates are unchanged. Normally thresholds rise with inflation each year; while they are frozen, they do not.
The Frozen Thresholds
These apply in England, Wales and Northern Ireland (Scotland sets its own income tax bands):
| Threshold | 2026/27 level | Frozen until |
|---|---|---|
| Personal Allowance | £12,570 | April 2031 |
| Higher rate (40%) threshold | £50,270 | April 2031 |
| Additional rate (45%) threshold | £125,140 | April 2031 |
The main National Insurance thresholds are frozen to the same date. By 2031 the personal allowance and higher rate threshold will have been fixed for nine years, so even modest annual pay rises add up to a significant amount of income moving into the 20% and 40% bands.
Other Changes Adding to the Squeeze
- Dividends (from April 2026): the ordinary and upper dividend rates rose by two percentage points to 10.75% and 35.75%. The additional rate stays at 39.35%, and the dividend allowance remains £500.
- Savings and property income (from April 2027): rates on savings income, and on property income in England, Wales and Northern Ireland, are due to rise to 24%, 44% and 49% — the November 2025 Budget added two percentage points and the October 2026 Budget a further two. Landlords should factor this into their plans — see our landlord accountancy service.
Who Is Most Affected?
- Employees getting pay rises — more of each rise is taxed, and those near £50,270 can tip into the 40% band.
- Company directors — frozen bands and higher dividend tax change the best mix of salary and dividends. If you work through your own company, our contractor accountants can review it.
- Earners between £100,000 and £125,140 — the personal allowance is withdrawn at £1 for every £2 over £100,000, creating an effective 60% rate in this band. With the £100,000 limit fixed, more people reach it each year.
What Can You Do?
The freeze is set to run until 2031, so planning around it is the practical response:
- Pension contributions — personal contributions extend your basic rate band or reduce taxable pay, which can keep income below £50,270 or £100,000.
- Salary sacrifice — still saves income tax and NI. From April 2029, sacrificed pension contributions over £2,000 a year will attract NI, but the income tax saving remains.
- ISAs — interest, dividends and gains inside an ISA are tax-free, which matters more as dividend and savings rates rise.
- Gift Aid — donations extend your basic rate band, so higher rate taxpayers can claim extra relief.
- Use both partners' allowances — couples can sometimes rearrange savings or investments so more income is taxed at the lower rate.
The Budget on 28 October 2026 kept the income tax and NI thresholds frozen until April 2031 and left the rates on earnings and dividends unchanged. Its main change was the further rise in savings and property income rates shown above.
Is fiscal drag pushing up your tax bill?
A review can find legitimate ways to reduce what you pay. See our tax planning services or book a free call with our team.