Fiscal Drag & the Income Tax Threshold Freeze – What RJP LLP Clients Need to Know

October 2025

What’s happening with fiscal drag?

The UK government has frozen personal tax thresholds since April 2022, and this is set to continue until at least 2027–28. Normally, thresholds (like the personal allowance or higher-rate limit) increase each year with inflation. By keeping them fixed while wages rise, more people are pushed into paying higher tax rates even if their income hasn’t risen in real terms.
This effect is called “fiscal drag.”

Key frozen thresholds

• Personal Allowance (tax-free income): £12,570
• Basic Rate limit (20% band): £50,270
• Higher Rate (40% band): from £50,271 to £125,140
• Additional Rate (45% band): over £125,140

These thresholds are set to stay in place until April 2028.

Why this matters

• Inflation and pay increases mean more of your income is taxed at 40% or even 45%, even if your real spending power hasn’t increased.

• HMRC estimates that by 2028, millions more people will be higher- or additional-rate taxpayers compared to if thresholds had increased with inflation.

• In effect, you are likely to see your take-home pay shrink despite earning more on paper.

A simple example

• In 2021, someone earning £48,000 paid tax only at the basic rate (20%).
• By 2025, if their salary increased with inflation to £53,000, they would cross the frozen higher-rate threshold (£50,270) and pay 40% on part of their income.
• Result: higher tax bill without being “richer” in real terms.

Strategies to soften the impact

While we cannot change the thresholds, there are legitimate ways to reduce the effect of fiscal drag:

1. Pension contributions
Contributions can reduce your taxable income, keeping more of your earnings in the basic rate band.
You also benefit from tax relief on contributions.

2. Individual Savings Accounts (ISAs)
Interest, dividends and capital gains inside an ISA are tax-free.
Making use of the £20,000 annual ISA allowance protects future investment income from creeping tax.

3. Salary sacrifice
Some employers allow you to give up part of your salary in exchange for pension contributions or other benefits, lowering taxable income.

4. Gift Aid donations
Charitable donations under Gift Aid can extend your basic rate band, reducing higher-rate exposure.

5. Family tax planning
Where appropriate, transferring income producing assets to a spouse/civil partner who pays tax at a lower rate can reduce the household tax bill.

What RJP LLP can do for you

• Review your income sources to see how close you are to higher thresholds.
• Model different scenarios (e.g. pension contributions, salary sacrifice) to show savings.
• Plan strategies using ISAs and other tax-efficient wrappers.
• Advise on long-term planning, including estate planning where frozen inheritance tax thresholds also apply.

Bottom line

The threshold freeze to 2027–28 is a “stealth tax” that quietly raises the tax take. Many RJP LLP clients will feel its effects in the coming years. By planning ahead—using pensions, ISAs, and other reliefs—you can reduce its impact and keep more of your income.