Income Tax Thresholds Frozen to 2031: Fiscal Drag Explained

Without a freeze, income tax thresholds would usually rise with inflation each April. Instead the personal allowance has been £12,570 and the higher-rate threshold £50,270 since April 2021, and the law now holds them there until 5 April 2031. The freeze was announced in March 2021 to run to April 2026, extended in November 2022 to April 2028, and extended by three more years at the Autumn Budget 2025, a change made law by Finance Act 2026.

Which thresholds are frozen until 2031?

• Personal allowance: £12,570, the income you can have before income tax starts.
• Higher-rate threshold: £50,270, the personal allowance plus the £37,700 basic-rate band.
• Additional-rate threshold: £125,140, cut from £150,000 in April 2023.
• National Insurance: the point where employee and self-employed contributions start stays tied to the personal allowance, the point where the main rate stops stays tied to the higher-rate threshold, and the employer threshold stays at £5,000.

The personal allowance applies across the UK, but Scotland sets its own bands and rates on earnings, pensions and rental income, so its thresholds above the allowance are decided at Holyrood.

What is fiscal drag?

Fiscal drag is what happens when thresholds stand still while pay and prices rise. More of each pay rise is taxed, and more people cross into higher bands, without any rate going up. Take someone earning £30,000 who gets a 5% pay rise to £31,500 in 2026-27:

• Before the rise, £30,000 less the £12,570 allowance leaves £17,430 taxed at 20%: £3,486.
• After it, £31,500 less £12,570 leaves £18,930 taxed at 20%: £3,786. Pay has gone up 5% and income tax £300, or 8.6%.
• Had the allowance also risen 5%, to £13,198.50, the bill would have been £3,660.30. The freeze costs £125.70 in that single year.

Employee National Insurance behaves the same way, because its thresholds are frozen too. A rise that carries you past £50,270 does more: the part above it is taxed at 40%, your personal savings allowance falls from £1,000 to £500, and dividends above the allowance are taxed at 35.75% rather than 10.75%.

Pensioners meet the same squeeze. The full new State Pension is £241.30 a week in 2026-27, or £12,547.60 a year, £22.40 below the frozen allowance, and because the triple lock raises it by at least 2.5% a year it is due to pass the allowance in April 2027. At the Autumn Budget 2025 the government said that people whose only income is the basic or new State Pension will not have to pay the small amounts of tax this creates through Simple Assessment from 2027-28.

Why is there a 60% tax rate between £100,000 and £125,140?

Once your adjusted net income passes £100,000, the personal allowance shrinks by £1 for every £2 above it, and it has gone completely at £125,140. Adjusted net income is your total taxable income less certain reliefs, such as grossed-up personal pension contributions and Gift Aid donations. The £100,000 starting point has not moved since the taper began in 2010.

Take income rising from £100,000 to £110,000 in 2026-27. The extra £10,000 is taxed at 40%, which is £4,000. It also removes £5,000 of allowance, putting another £5,000 into tax at 40%, which is £2,000. That is £6,000 of tax on £10,000 of extra income, a 60% marginal rate, and employees pay 2% National Insurance on top.

What does the freeze not change?

• The rates. Earnings are still taxed at 20%, 40% and 45%; the freeze raises tax only as income rises.
• Earnings that stand still. If your earnings do not rise, the tax on them does not rise either. The cost arrives through pay rises and pension increases.
• The separate rate rises. Dividend tax went up 2 points on 6 April 2026, and savings and rental income move to their own higher rates on 6 April 2027. Those are separate measures that sit on top of the freeze.

CoreFi's Budget page lists the freeze with the other measures already in law and works out what the rate changes cost you from your own figures. What, if anything, to do about fiscal drag depends on your circumstances, and a qualified adviser can advise.