The pay rise that does not feel like one: how frozen tax thresholds quietly reach your income
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There is a specific kind of disappointment that arrives with a pay rise. The letter says one number, the payslip says something rather less, and the gap between the two is bigger than you expected. Nobody has done anything to you. Your tax rate has not gone up. What has happened is that the lines have stopped moving while your salary carried on.
That is fiscal drag, and it is doing a great deal of quiet work in the UK tax system at the moment. The personal allowance sits at £12,570, the higher rate threshold at £50,270 and the additional rate threshold at £125,140. None of those figures has changed for several years, and at the Autumn Budget in 2025 the freeze was extended again, now running until April 2031. The House of Commons Library estimates that keeping them fixed rather than raising them with inflation will bring around 700,000 more people into income tax by 2030/31.
Why it feels worse than it is, and worse than it looks
First, the reassuring part. Crossing a threshold does not mean your whole income is taxed at the higher rate. Only the slice above the line is. Plenty of people brace for a much bigger hit than the one they actually take, and it is worth understanding that properly before making any decisions in a panic.
The less reassuring part is that the effect compounds. Every year your pay rises and the thresholds do not, a little more of your income sits in the band above. National Insurance thresholds have been frozen on the same timetable, so the same drift applies there. And there are further changes already scheduled: dividend tax rates went up by two percentage points from April 2026, and from 6 April 2027 the rates on savings interest and on rental income each rise by two percentage points as well. If your income comes from more than just a salary, that is worth knowing now rather than next spring.
Take Gareth, aged forty-eight, a fictional client in a very ordinary position. His salary has crept up to just under the higher rate threshold, and a modest bonus takes him over it for the first time. His assumption, when he sat down with us, was that he had lost a chunk of everything he earns. In fact only the part above £50,270 is affected. What did surprise him was the direction of travel: on his employer's usual pay reviews, and with the thresholds fixed until 2031, more of his income will fall into that band every year without him doing anything at all. That is the bit worth planning around, rather than the one-off bonus.
The awkward stretch above £100,000
One threshold deserves singling out because it behaves oddly. Once your adjusted net income passes £100,000, your personal allowance is withdrawn by £1 for every £2 above that figure, and it has gone entirely by £125,140. Losing the allowance while also paying tax on the income means the effective rate on that stretch of earnings is considerably higher than the 40 per cent headline suggests, which is why you will often hear it described as a 60 per cent band. Because the £100,000 figure is also used as a test for some other entitlements, including certain childcare support, a bonus that nudges you past it can cost more than the tax alone.
What actually helps, and what it costs you
There is no clever trick that makes fiscal drag disappear, but the shape of your income is not always fixed. Pension contributions are the usual starting point, because they reduce the income on which tax is assessed, and for someone hovering around a threshold that can matter more than the headline relief. The trade-off is real, though: money in a pension is not available to you until at least the minimum pension age, it is invested so its value can fall as well as rise, and there are annual limits on how much you can pay in with tax relief. It is not a way of avoiding tax so much as a decision to defer income until later, when your circumstances and the rules may both look different.
Elsewhere, the same logic applies to where your savings and investments sit rather than to how much you earn. Interest and rental income are becoming more expensive to hold outside a tax wrapper from 2027, and ISAs remain the obvious shelter, subject to their own allowances and their own risks where the money is invested. A few other things are worth a look if they apply to you:
• Whether you and a spouse or civil partner hold savings and investments in the correct structure
• Whether charitable giving through Gift Aid affects your position, as it can extend your basic rate band
• Whether a bonus could be taken differently, if your employer allows any flexibility
• Whether any allowances you are entitled to are simply going unclaimed
All of this is general information rather than a recommendation, and tax is based on current legislation and HMRC practice, both of which can change. The right answer depends on your income, your household and what you want the money for.
In summary
Frozen thresholds mean the tax system takes a little more each year without any rate ever changing, and with the freeze now running to April 2031 that drift has a long way left to go. Crossing a threshold is rarely as painful as people fear, but the cumulative effect is real, and the stretch above £100,000 deserves particular care. Where your income and savings sit can make a genuine difference, provided you understand what you give up in exchange.
If your income is drifting towards one of these thresholds, or a bonus has pushed you past one, we can help you see the whole picture rather than one number on a payslip. Do get in touch with us at ACJ and we will talk it through with you.