How Much Extra Tax Are You Paying Because of the Threshold Freeze?
By TaxHelper Editorial · Last updated 11/06/2026
Since April 2021, the UK's Personal Allowance has been frozen at £12,570 and the higher-rate threshold locked at £50,270. Wages have risen — but the point at which you start paying tax, and the point at which you pay 40%, have not moved. The result is that millions of workers are paying substantially more tax than they would have if thresholds had risen with inflation. Here is the precise cost at different salary levels.
What Is Fiscal Drag?
Fiscal drag is the mechanism by which inflation and wage growth pull more income into tax, without any government ever announcing a tax rise. When your salary goes up by 5% but the tax-free threshold stays the same, a larger share of your income becomes taxable. The government collects more revenue without changing a single rate.
The OBR estimates the current freeze will raise over £25 billion a year in additional tax by 2027/28 compared to if thresholds had risen with CPI. That revenue comes entirely from workers' pay packets.
How Much More Are You Paying? — By Salary Band
The table below compares estimated income tax at 2021/22 salary levels against equivalent incomes in 2026/27, assuming 25% cumulative wage growth over five years, with thresholds frozen throughout.
| 2021/22 Salary | 2026/27 Equivalent (×1.25) | Extra Taxable Income | Extra Annual Tax |
|---|---|---|---|
| £24,000 | £30,000 | £6,000 | ~£1,200 |
| £32,000 | £40,000 | £8,000 | ~£1,600 |
| £40,000 | £50,000 | £10,000 | ~£2,000 |
| £44,000 | £55,000 | £6,730 now at 40%* | ~£2,692 extra |
*The worker who earned £44,000 in 2021/22 would not have crossed the 40% threshold. At £55,000 in 2026/27 they pay 40% on £4,730 above the frozen higher-rate threshold of £50,270.
A Worked Example at £40,000
In 2021/22, a worker earning £40,000 paid income tax on £27,430 (£40,000 − £12,570). Their basic-rate tax bill was £5,486.
Assuming the same role now pays £40,000 in 2026/27 (unchanged), they still pay £5,486. But if their salary has risen to £47,000 (a modest 17.5% rise over 5 years), their taxable income is now £34,430 — and their income tax bill is £6,886. That is £1,400 more per year compared to 2021/22, with no tax rate increase announced.
You can verify your own position with our salary calculator — enter your current salary and compare year on year.
Who Is Most Affected?
The freeze hits three groups hardest:
- Workers who have crossed the £12,570 threshold for the first time — those whose wages have risen above the tax-free amount due to pay rises or the National Living Wage increase now pay income tax they did not pay in 2021.
- Workers approaching £50,270 — people who would not have entered the higher-rate band if thresholds had risen are now paying 40% on income that would previously have been taxed at 20%.
- Workers between £100,000 and £125,140 — the Personal Allowance taper zone has widened in real terms, meaning the effective 60% marginal rate applies to more people than intended.
What You Can Do: Pension Contributions
The most powerful tool is increasing pension contributions, particularly through salary sacrifice. When your employer reduces your gross pay and contributes the equivalent to your pension, you save both income tax (20% or 40%) and employee National Insurance (8% below the Upper Earnings Limit).
For a basic-rate taxpayer contributing an extra £1,000/year via salary sacrifice:
- Income tax saving: £200
- NI saving: £80
- Net cost of £1,000 into pension: £720
For a higher-rate taxpayer, the combined saving jumps to £420 — meaning it costs only £580 to put £1,000 into your pension.
What You Can Do: Salary Sacrifice for Other Benefits
Salary sacrifice is not limited to pensions. Many employers offer it for:
- Electric vehicles — Benefit-in-Kind rates for EVs are very low (currently 3%), making salary sacrifice for an EV extremely tax-efficient. A basic-rate taxpayer sacrificing £500/month for an EV saves approximately £168/month in tax and NI.
- Cycle to Work — Up to £1,000 (or £1,500 for e-bikes) of cycling equipment with no income tax or NI.
- Childcare Vouchers (legacy scheme) — If you are already enrolled, continuing to receive vouchers remains exempt up to £55/week.
See our salary sacrifice guide for a full breakdown of available schemes and tax savings.
What You Can Do: Check Your Personal Allowance
Some workers are entitled to claim additions to their Personal Allowance that reduce their taxable income — such as working from home relief, professional subscriptions, or Marriage Allowance — and have never done so. These can be worth £100–£300 per year in tax savings with a simple form or online claim. See our Personal Allowance guide for a full list.
The Outlook
The freeze is confirmed until April 2028. If wages continue growing at 3–4% per year, the cumulative extra tax paid by a worker earning £40,000 today versus a world with index-linked thresholds will exceed £5,000 by 2028. Acting now — through salary sacrifice, pension contributions, or tax-efficient benefits — is the most effective response available to employees.