The freeze on income tax thresholds has been extended until the 2030/31 tax year, forcing millions into paying more tax as their wages rise with inflation What is fiscal drag, and what are some ways to guard against it?
Chancellor Rachel Reeves announced that the income tax threshold freeze would be extended until at least the 203031 tax year, which means millions of taxpayers will have to pay more taxes.
Because of frozen thresholds, workers will be pulled into higher tax bands as their wages rise in line with inflationa phenomenon known as fiscal drag.
Since then-chancellor Rishi Sunak declared that income tax brackets would not be adjusted annually with inflation, as had been the norm for four years, income tax thresholds have been frozen since the 2022 - 2023 tax year.
Another Tory chancellor, Jeremy Hunt, subsequently extended the freeze for a further two years until the 2027/28 tax year.
In the 2025 Autumn Budget, Labour chancellor Rachel Reeves extended the freeze on income tax thresholds until the 2030/31 tax year.
Millions of UK taxpayers will have paid thousands more in income tax by the time the extended freeze ends because income tax bands will have remained unchanged for nearly ten years.
We examine what fiscal drag is, how much it will cost you, and why it has been imposed by successive governments.
What is fiscal drag? .
Fiscal drag is simply the term used to describe what happens when a government does not adjust their income tax thresholds according to inflation and wage growth data.
This means that a higher number of taxpayers are dragged into paying tax for the first time, or at a higher rate, despite the purchasing power of their money not increasing at the same rate.
For example, in Autumn 2022 (when tax bands were first frozen), the tax-free personal allowance was 12,570.
After accounting for inflation, 12,570 in 2022 was approximately 14,403 in October 2025, according to the Bank of England inflation calculator.
People who earn the equivalent of 12,570 in 2022 (which is 14,403 in 2025) are now paying tax on the 1,833 difference caused by inflation because tax bands have been frozen. Normally, tax bands are adjusted for inflation.
Therefore, people are being dragged into paying tax despite not earning more money in real terms. It is sometimes referred to as a "stealth tax" because the amount of tax collected rises while the tax rate does not.
What is the estimated cost of prolonged fiscal drag by 2031?
Because the income tax threshold freeze has been extended for an additional three years, taxpayers will be more severely affected by the fiscal drag, with higher earners suffering the most.
Taxpayers could be as much as 1,292 worse off thanks to the three year extension, research by AJ Bell suggests, compared to if the freeze ended in 2028 as planned.
But this will not be spread equally. Someone with a yearly income of 15,000 will only have to stomach an extra tax bill of 259 over the three year extension period.
In the meantime, a person on £47,000 will probably have to pay an additional £1,292 because their income is subject to the higher income tax rate.
How can you guard against financial drag?
There are some clever ways to lessen the impact of fiscal drag on your finances, even though there aren't many direct ways to avoid it aside from refusing to let your wages increase.
To begin with, it's critical to estimate your salary for the upcoming year so that you can make appropriate plans.
According to Coles, "it's going to be hard to predict whether you're going to get a pay rise, and if so, how big it will be."
However, it's worth estimating and determining if this will push you over a tax threshold and result in a higher tax rate for the current tax year.
Once you have established this, you can start to consider whether it is worth it for you to implement measures so that your income stays below the tax bracket you would otherwise enter.
This can be in the form of increased pension contributions or looking into salary sacrifice. Those who are set to breach tax thresholds may also want to utilise the tax wrapper that comes with a cash ISA or stocks and shares ISA.
Utilize the full amount of your ISA allowance.
Using the ISA tax wrapper can "help stop your savings and investment income push you over a threshold," says Coles.
This is because any growth that your money achieves in these accounts will not be taxed especially as the tax rates on savings and investment income will rise from April 2026.
Esmund at interactive investor echoes this view, saying: "ISAs and SIPPs are great tools. To keep more of your money, a good strategy is to make the most of tax wrappers and to keep your portfolio costs low (keep an eye on fees). "
"Though few of us will be able to max out the allowance each year, prioritise using the most of this allowance before the allowance refreshes even if youve not decided how to invest it, its worth making the contributions," she continued.
The maximum you can save in an ISA in any given tax year is currently 20,000, but this is set to change in April 2027. You can only save up to 12,000 in a cash ISA, but the overall 20,000 cap will still apply. Over-65s are exempt from this new regulation.
Put more into your pension.
Putting a larger portion of your pay into your pension is one way to lower your taxable income; Esmund says this strategy "should not be underestimated".
This is because "unlike ISAs, you can roll over any unused allowance from the past three years and claim tax relief". She added: "In fact, if youre nervous about your tax bill one option could be paying a bit more into your pension. A "
Esmund notes that while this will leave you with less money in your pay packet at the end of each month, you will get upfront tax relief on your contributions and youll still be able to enjoy the cash when you retire.
If you do this, "youll get an immediate 25 per cent boost in the form of a government top up and can claim back extra through self-assessment if you earn enough to pay 40 per cent or 45 per cent tax," she said.
Consider salary sacrifice.
Salary sacrifice offers another way for you to reduce your salary and therefore avoid the negative effects of fiscal drag.
Coles at Hargreaves Lansdown explains that "in some cases, the government will let you give up a portion of your salary, and spend it on certain things free of tax (and in some cases National Insurance). "
Salary sacrifice could be used to put more in your pension, get childcare vouchers, buy a bike through the bike-to-work schemes, and could be spent on other technology schemes.
"It won't increase your take-home pay, but it will reduce your tax bill and make your money go farther, so it's worth checking with your employer whether they offer this," she continued.
A 2,000 annual cap is scheduled to be implemented in April 2029, which will alter the amount you can salary sacrifice into a pension without having to pay National Insurance.
Plan your income.
Another way to avoid the worst of fiscal drag is to carefully plan when your income enters your account.
Coles explains: "If theres a time when you expect to be paying a lower rate of tax, consider whether you can take income then rather than now. "
For instance, rather than choosing an easy access option that makes more frequent payments, you could choose a fixed term savings account that pays interest once a year. You could then have the fixed savings interest pay out once youre in a lower tax bracket.
"Just before retirement, this often makes sense," Coles said.
"If this money is currently sitting in accounts paying interest in the current tax year, then from a tax perspective, the sooner you move them, the better.
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