You may not have had a tax rise announced in your name, yet you could still be paying more tax each year than you were. This quiet effect is known as fiscal drag, and with tax thresholds now frozen until April 2031, it is worth understanding how it works and what you can do about it.

What is fiscal drag?

Fiscal drag happens when the income thresholds at which tax becomes due stay fixed while wages and incomes rise. Because the thresholds do not move with inflation, a pay rise can push more of your income into a higher tax band, or into tax altogether, even though your spending power has not really improved.

The personal allowance (the amount you can earn before paying income tax) and the higher-rate threshold have been frozen since April 2022. Originally the freeze was due to end in April 2028. At the Autumn Budget in November 2025 it was extended by a further three years, to April 2031.

In practice that means:

• The personal allowance remains at £12,570.
• Higher-rate (40%) tax still begins at £50,270.
• The additional-rate (45%) threshold stays at £125,140.

Each year that wages rise against these frozen figures, more people are drawn into paying tax for the first time, or into the higher and additional rates. It is often called a stealth tax because no headline rate has changed.

Where it bites hardest

A few points are worth watching:

• Crossing into higher-rate tax. A modest pay rise can take part of your income over £50,270, taxing that slice at 40% rather than 20%.
• The £100,000 trap. Between £100,000 and £125,140, the personal allowance is withdrawn by £1 for every £2 earned, creating an effective tax rate of 60% on that band.
• Loss of allowances and benefits. Higher taxable income can reduce your savings and dividend allowances and affect entitlement to the High Income Child Benefit Charge.

How to reduce the impact

Fiscal drag is not something you can stop, but there are legitimate, well-established ways to manage your taxable income so that more of it stays with you.

1. Pension contributions. Paying into a pension reduces your adjusted net income, which can keep you below a threshold such as £50,270 or £100,000, while also building your retirement savings. For many people this is the single most effective tool.

2. Salary sacrifice. Exchanging part of your salary for pension contributions or other benefits lowers the income that is assessed for tax and National Insurance.

3. Make full use of ISAs. Income and gains within an ISA are tax-free and do not count towards your taxable income, making the annual allowance a valuable shelter as other thresholds stay frozen.

4. Share income between spouses or civil partners. Where one partner pays a lower rate of tax, moving savings or investments into their name can use allowances that would otherwise be wasted. The Marriage Allowance may also apply.

5. Charitable giving. Gift Aid donations can extend your basic-rate band and reduce your adjusted net income, which can be useful around the key thresholds.

6. Consider timing. Where you have control over when income or gains fall, spreading them across tax years can help you stay within lower bands.

The value of planning ahead

With thresholds now fixed for several more years, the effect of fiscal drag compounds over time. Reviewing your income, pensions and investments regularly, rather than once a crisis appears, is the most reliable way to keep more of what you earn.

At Grafton Wealth Management we help clients plan around changes like these, taking account of individual circumstances and long-term goals. If you would like to understand how the frozen thresholds affect you, we would be glad to talk it through.