Frozen tax thresholds, understanding fiscal drag
Overview
The standard Personal Allowance remains £12,570 and the basic-rate limit remains £37,700. These figures have been unchanged since 2021/22. Following the extension in Finance Act 2026, they are fixed up to and including 2030/31, ending on 5th April 2031, unless future legislation changes them.
For someone with the full Personal Allowance in England, Wales or Northern Ireland, this normally gives a higher-rate threshold of £50,270 for employment income and self-employed profits. Scotland has different bands and rates for non-savings, non-dividend income.
Frozen thresholds can increase tax bills without an increase in the headline rate. This is known as fiscal drag: as pay, profits or pensions rise, more income becomes taxable and more people enter higher tax bands.
The OBR’s November 2025 forecast estimated that threshold freezes would bring 5.2 million additional people into Income Tax by 2030/31. This is a forecast against an alternative in which thresholds were uprated, not a confirmed count or an estimate solely of the latest extension.
Employees, sole traders, partners, directors and pensioners should review their income forecasts. The Autumn Budget is scheduled for 28th October 2026, but planning should distinguish existing rules from possible future announcements.
Detailed Content
What has been frozen?
The principal Income Tax figures are:
Personal Allowance: £12,570, subject to eligibility and the income-related taper.
Basic-rate limit: £37,700 of taxable income after allowances. Combined with the full standard allowance, this gives the usual £50,270 higher-rate threshold in England, Wales and Northern Ireland.
Personal Allowance taper: the allowance falls by £1 for every £2 of adjusted net income above £100,000, reaching zero at £125,140.
Additional-rate threshold: reduced from £150,000 to £125,140 from 6th April 2023. This was a separate policy change, not simply a freeze.
Finance Act 2026 extends the Personal Allowance and basic-rate limit freeze through 2030/31. Published policy also maintains the corresponding main employee and self-employed National Insurance thresholds through that period; NI rates and thresholds are set through the relevant regulations.
Not every allowance or NI threshold has been frozen since 2021. For example, the main employee NI starting threshold was increased during 2022, and the employer NI starting threshold was reduced from April 2025. Use the correct year’s figures rather than treating all thresholds as one policy.
How fiscal drag works
When gross income rises but allowances and bands do not, a greater proportion of income can become taxable. Crossing a band boundary also means some additional income is taxed at a higher marginal rate.
Take-home pay can still increase while the average proportion paid in tax rises. If pay growth merely compensates for inflation, a person may pay more tax without enjoying a comparable improvement in purchasing power.
Why the £50,270 threshold matters
For a person with the full standard Personal Allowance in England, Wales or Northern Ireland, employment income or self-employed profits above £50,270 normally enter the 40% band. The higher rate applies only to the relevant slice, not all income.
Strictly, £50,270 is the usual total-income threshold, not the amount of taxable income after deducting the allowance. The basic-rate limit for taxable income is £37,700.
Pension contributions, Gift Aid, other income and allowances can alter the result. Dividends have separate tax rates, although they use tax-band capacity. Scottish taxpayers must use the appropriate Scottish rates for non-savings, non-dividend income; savings and dividend rates are UK-wide.
The £100,000 Personal Allowance taper
Adjusted net income, rather than salary alone, determines the taper. It can include taxable benefits, business profits, pensions, dividends, interest and rental income, less specified reliefs.
For a taxpayer whose extra income is subject to 40% tax, losing £1 of allowance for every £2 of additional income can produce an effective 60% Income Tax marginal rate within the taper range. That is not a separate statutory tax band. The result differs for Scottish income and for different income types, and NI or other charges may apply as well.
National Insurance, the separate calculation
For 2026/27, a standard category A employee normally pays NI at 8% on earnings between the main £12,570 and £50,270 annual equivalents, and 2% above the upper limit. Ordinary employee NI is generally calculated by pay period, so annual figures are a guide rather than a substitute for payroll calculations.
For most self-employed people, Class 4 NI is 6% on annual profits above £12,570 up to £50,270, and 2% above that. Since April 2024, most no longer have to pay compulsory Class 2 contributions. In 2026/27, Class 2 is treated as paid where profits reach £7,105; below that level, voluntary payments may be appropriate to protect the NI record.
Employer NI is normally 15% above the applicable secondary threshold, whose annual equivalent is £5,000 in 2026/27, subject to category-specific reliefs and any Employment Allowance entitlement. This is an employer cost, not a deduction from the employee’s net pay.
The fall in the employee and Class 4 NI rate above £50,270 can partly offset the increase in Income Tax at that point. Do not assume a 40% Income Tax rate is added to the main 8% or 6% NI rate on the same slice.
Directors have special annual NI rules. State Pension age, employment status and category letters can also change the calculation. Pension income and dividends do not ordinarily attract employee Class 1 or self-employed Class 4 NI.
Who is affected?
Employees: pay reviews, overtime, bonuses and taxable benefits can move income across frozen thresholds.
Sole traders and partners: rising taxable profits, not turnover alone, can increase Income Tax and Class 4 NI.
Directors and shareholders: salary, dividends, pensions, company tax and employer NI need to be modelled together.
Pensioners: taxable pension increases can use up the Personal Allowance even though pension income itself is not subject to NI.
Higher earners and families: income changes can affect the allowance taper and income-tested charges or support, which have their own rules.
What do the forecasts show?
The OBR’s November 2025 analysis projected 5.2 million additional Income Tax payers, 4.8 million more higher-rate taxpayers and 600,000 more additional-rate taxpayers by 2030/31 as a result of the threshold measures assessed. These are separate forecast categories and should not be added together as a count of unique people.
Forecasts depend on earnings, inflation and policy assumptions. They do not establish what an individual will owe and should be rechecked when a new OBR forecast is published.
Planning before the Autumn Budget
The Budget is scheduled for 28th October 2026. Further changes cannot be assumed before they are announced, and any announcement must be checked for its commencement date and legislative status.
Pension contributions and Gift Aid may reduce adjusted net income and affect tax-band calculations. Personal pension relief is subject to relevant earnings rules, as well as pension annual-allowance rules. Carry forward does not remove the relevant earnings limit for personal contributions; the tapered annual allowance and money purchase annual allowance may also matter.
Employer pension contributions do not simply deduct an amount from existing personal income. They may form part of a remuneration plan, with separate company, pension and employment considerations.
Salary, dividends and business income cannot simply be moved between years by changing paperwork. Follow the applicable recognition rules, ensure dividends are supported by distributable profits, and consider cash flow before committing money to pensions or other arrangements.
Step by Step Procedure
Identify your tax status, Scottish taxpayer status where relevant, and the tax year being reviewed.
Forecast salary, bonuses, taxable benefits, business profits, dividends, savings, property income and pensions.
Calculate taxable income and adjusted net income separately; compare them with the relevant bands and allowance-taper thresholds.
Model the effect of an extra £1,000 of salary, profit or dividends using the correct Income Tax and NI rules for that income type.
Check pension and Gift Aid options, including contribution method, relevant earnings, pension allowances and affordability.
For directors, include Corporation Tax, employer NI, dividend tax, distributable reserves and company cash requirements.
Update tax reserves and any payments-on-account forecast. Business turnover alone is not a tax calculation.
Review official announcements after 28th October 2026, checking when any changes take effect. Avoid irreversible decisions based on rumours.
Revisit the forecast after material income changes, rather than waiting until the tax return is prepared.
Frequently Asked Questions and Answers
Is a freeze the same as a tax-rate rise?
No. The headline rate can remain unchanged while more income becomes taxable. Fiscal drag describes that effect. Separate rate changes can also occur, so a freeze does not mean every rate is unchanged.
How long is the Personal Allowance frozen?
The £12,570 standard allowance and £37,700 basic-rate limit are fixed through 2030/31 under current legislation, ending on 5th April 2031. Future legislation could change that position.
When does the 40% rate start?
Normally above £50,270 of total income for someone with the full standard allowance in England, Wales or Northern Ireland, for income subject to those main rates. Reliefs and other income can change the calculation. Scotland has different rates for non-savings, non-dividend income, and dividends use separate rates.
What happens above £100,000?
The Personal Allowance is reduced by £1 for every £2 of adjusted net income above £100,000, reaching zero at £125,140. This can produce a high effective marginal rate in the taper range.
Do higher profits increase Class 2 NI?
Most self-employed people no longer pay compulsory Class 2. Class 4 may increase with taxable profits; Class 2 is normally treated as paid once profits reach the applicable threshold, with voluntary payments available in some lower-profit cases.
Can pensions reduce the impact?
Qualifying personal contributions can reduce adjusted net income or provide tax relief, depending on the method used. Check relevant earnings, annual allowances, any taper or money purchase restrictions, and access needs. An employer contribution has a different treatment.
What should I do before the Budget?
Prepare a 2026/27 income forecast, identify thresholds you may cross and reserve cash for tax. Review lawful planning options with your accountant, then update the plan after confirmed announcements rather than acting on speculation.