Income tax rates haven’t gone up. And yet, if you’ve had a pay rise over the last few years, there’s a good chance more of your income is being taxed at a higher rate.
That’s not a coincidence. It’s because key tax thresholds have been frozen while wages have risen. This quiet mechanism, known as fiscal drag, gradually pulls more of your earnings into higher tax bands each year, without any headline-grabbing rate increases.
What Does “Frozen Tax Bands” Actually Mean?
In England and Northern Ireland, the personal allowance is fixed at £12,570 and the higher-rate threshold at £50,270. These are currently legislated to remain frozen until April 2031.
On paper, nothing changes. But in reality, as salaries increase through inflation adjustments, promotions or bonuses, more income becomes taxable, and more of it can fall into the 40% bracket.
And low and behold, you pay more tax even though the rates themselves haven’t moved.
The Maths Behind the Squeeze
Let’s say your salary was £48,000 a few years ago. You were comfortably below the higher-rate threshold.
Now imagine steady pay rises take you to £53,000. Only £2,730 of your income sits above £50,270, but that portion is taxed at 40% instead of 20%.
That’s not just a higher tax bill. It’s a change in your effective tax rate.
According to the Office for Budget Responsibility, millions more people are expected to become higher-rate taxpayers by the end of the freeze period. Not because they’ve suddenly become “high earners”, but because thresholds have stood still while wages have moved (even if, after inflation, your relative spending powers hasn’t).
Who Feels it Most?
Middle earners are often the most exposed. A modest pay rise can tip income into the higher-rate band faster than many expect.
Those earning above £100,000 face another layer. At that level, the personal allowance begins to taper away, creating an effective 60% marginal tax band between £100,000 and £125,140.
None of this involves new tax rates. It’s simply how fixed thresholds interact with rising income.
What Can Be Done?
You can’t change the thresholds, but you can plan around them:
- Pension contributions remain one of the most effective tools. Contributions attract tax relief at your highest marginal rate, which can reduce your taxable income and potentially move you back below a threshold.
- Salary sacrifice arrangements can also help lower headline income while boosting pension savings.
- ISAs won’t reduce your income tax today, but they can provide tax-free growth and withdrawals in the future, giving you flexibility when managing income later on.
Two often-overlooked levers are Gift Aid donations, which can extend your basic-rate band and reduce higher-rate exposure, and timing.
For example, bringing forward pension contributions if you’re close to a threshold can keep more income taxed at 20% rather than 40%. Allowance limits and individual circumstances matter, so it’s worth checking before you act.
Summary
The key is awareness. Frozen tax bands don’t feel dramatic; they don’t make headlines. But over time, they can steadily increase your tax exposure if you don’t adjust your planning.
If your income has crept up over the past few years, it may be worth reviewing whether your tax strategy has kept pace with it. A small shift in planning now can prevent a larger tax bill later.
If you’d like to sense-check your position, give us a call on 020 8366 4400 or email enquiries@cedarhfs.co.uk to arrange a conversation.