Income tax personal allowance has been frozen at £12,570 since April 2021 and stays frozen until at least 2028. With wages rising, HMRC collects billions more each year — purely from fiscal drag, not from any announced tax rise. The OBR estimates 3.7 million more people will be dragged into paying income tax or higher rates by 2028.
What are frozen thresholds?
Income tax in the UK operates through a set of thresholds that divide your income into bands, each taxed at a different rate. The key thresholds are:
- Personal Allowance: the amount you earn tax-free each year (£12,570)
- Basic Rate Limit: the top of the 20% band (£50,270)
- Higher Rate Threshold: where 40% tax begins (£50,271)
- Personal Allowance taper: begins at £100,000, where the allowance is withdrawn at 50p per £1 of income, creating a 60% effective marginal rate
Historically, these thresholds were increased each year — usually by CPI inflation — to ensure that the real value of the tax-free allowance was maintained. The freeze began in April 2021 and has been extended several times. It is currently legislated to last until April 2028.
How fiscal drag works
The mechanism is simple. If your salary grows from £40,000 to £43,000 over three years (a modest 2.5% per year, roughly tracking wage growth), more of your income sits in the 20% tax band than before. Your tax bill rises even though no rate has changed. This is fiscal drag.
Now add the personal allowance freeze. In 2021, the first £12,570 of your income was tax-free. In 2026/27, it is still £12,570 — despite general price levels rising by approximately 22% between 2021 and 2026 (OBR consumer prices data). In real terms, the personal allowance is worth around 18% less than it was in 2021. HMRC collects income tax on a larger real portion of every worker's income — without ever announcing a rate rise.
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The OBR's estimate of the cost
The Office for Budget Responsibility has modelled the impact of the threshold freeze extensively. Its March 2024 Economic and Fiscal Outlook contained a specific box analysis showing that, compared to a scenario where thresholds rose with CPI from 2021, the freeze would:
- Raise approximately £25 billion extra per year by 2027/28
- Drag 3.7 million additional people into income tax, or into higher tax bands
- Push approximately 1 million people into the 40% higher-rate band who would not otherwise be there
- Reduce the real value of the personal allowance to below its 2010 level in purchasing-power terms
To put the £25 billion in context: the UK's entire defence budget in 2024/25 was approximately £58 billion. The additional tax collected from frozen thresholds amounts to approximately 43% of the entire defence budget — extracted from workers without a single announced rate change.
Who's most affected
The threshold freeze has different effects at different income levels:
| Scenario | Threshold 2021 | CPI-uprated 2026/27 equivalent | Actual 2026/27 | Hidden drag (£/yr) |
|---|---|---|---|---|
| Personal Allowance | £12,570 | ~£15,350 (CPI +22%) | £12,570 | ~£556 extra tax (20% on £2,780) |
| Basic Rate Limit | £50,270 | ~£61,329 (CPI +22%) | £50,270 | ~£4,423 (40% on £11,059 extra) |
| Higher-Rate Threshold | £50,270 | ~£61,329 | £50,270 | Drag into 40% band for many |
| PA taper starts | £100,000 | ~£122,000 | £100,000 | ~£13,200 (60% on £22k) |
CPI uprating is approximate, based on ONS CPI data 2021–2026. Drag figures are indicative, not exact for any individual. Source: ONS, HMRC, OBR.
What happens in 2028
The current freeze runs to April 2028. After that date, the government has indicated thresholds will rise again — though no specific commitment has been made to restore the real value lost during the freeze period. The OBR's forecasts assume CPI-linked rises from 2028/29.
What will not happen is a retrospective correction. The billions collected during the freeze period via fiscal drag will not be returned. The cumulative real-terms reduction in the personal allowance since 2021 — approximately 18% of its 2021 purchasing power by 2028 — will represent a permanent structural transfer from workers to the Treasury unless future governments actively reverse it.
Ways to reduce your exposure
Fiscal drag cannot be fully avoided, but several HMRC-approved mechanisms reduce its impact:
- Pension salary sacrifice: Reduces your gross salary, reducing the income subject to the higher-rate 40% band. Every £1,000 put into a pension via salary sacrifice saves £400 if you are a higher-rate taxpayer — and removes that income from fiscal drag.
- ISA contributions: Growth inside an ISA is exempt from income tax and capital gains tax. The £20,000 annual ISA allowance provides a significant shield for investment returns from future fiscal drag.
- Gift Aid charitable giving: Extends the basic rate band, keeping more income in the 20% rather than 40% bracket.
- Venture Capital Trusts / Enterprise Investment Scheme: For higher earners, these HMRC-approved vehicles offer income tax relief and CGT exemption — though they carry investment risk.
- Personal pension contributions (not via employer): You can claim higher-rate relief via self-assessment, which is not automatic for all taxpayers — meaning many people overpay tax by not claiming it.
Cut your taxable income below the 40% threshold
If your income is close to £50,270, pension contributions can keep you in the basic-rate band and reclaim higher-rate tax relief. Vanguard's SIPP charges just 0.15% per year — making it one of the lowest-cost pension options available in the UK.
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