Fiscal drag is what happens when tax thresholds — the amounts of income above which you start paying tax, or start paying a higher rate — are held constant while wages and prices rise with inflation.
Because your salary goes up (at least nominally) but the tax bands do not expand to match, more of your income gets taxed. You may even cross into a higher tax band. The government collects more in tax without ever announcing a rate increase.
It is sometimes called a stealth tax or bracket creep (particularly in the United States, where the term originated). In the UK, the mechanism is straightforward: HMRC applies the same tax bands year after year, while inflation slowly erodes the real value of the thresholds.
To understand fiscal drag, it helps to separate real income from nominal income.
If inflation runs at 5% per year and your employer gives you a 5% pay rise, your nominal income has gone up but your real income is unchanged — you can still buy exactly the same basket of goods as before. Yet if the tax bands have not moved, you are now paying tax on a larger share of your salary, and potentially at a higher marginal rate.
The key point: your real living standard has not improved, but your tax bill has increased. That is the fiscal drag effect.
Key principle: When thresholds are frozen and wages rise with inflation, the government is effectively raising taxes — just without a formal announcement or vote. This is why economists and critics call it a stealth tax.
In the March 2021 Budget, the then-Chancellor announced that the personal allowance and the higher-rate income tax threshold would be frozen at 2021/22 levels until April 2026. This was subsequently extended to April 2028.
The thresholds frozen are:
| Threshold | 2021/22 Level (Frozen) | 2026/27 (Same) | If Uprated With CPI |
|---|---|---|---|
| Personal Allowance | £12,570 | £12,570 | ~£15,500 |
| Higher-Rate Threshold | £50,270 | £50,270 | ~£62,000 |
The gap between the frozen thresholds and where they would be if uprated with CPI inflation (roughly 25–30% since 2021) is the measure of fiscal drag. Workers earning above those inflation-adjusted levels are paying more income tax than they would have under an indexed system.
According to the Office for Budget Responsibility (OBR), the cumulative freeze is expected to bring around 3–4 million more people into paying income tax and push around 2–3 million more into higher-rate by the end of the freeze period.
2021: Taxable income = £28,000 − £12,570 = £15,430 × 20% = £3,086 tax
2026: Taxable income = £34,000 − £12,570 = £21,430 × 20% = £4,286 tax
Extra tax paid vs 2021 = £1,200/year
Adjusted personal allowance: £15,500
Taxable income = £34,000 − £15,500 = £18,500 × 20% = £3,700 tax
Fiscal drag cost = £4,286 − £3,700 = £586/year extra tax from frozen bands
2021: All income below £50,270 threshold — entirely basic-rate taxpayer.
2026: £7,730 of income (£58,000 − £50,270) now falls in the 40% higher-rate band.
Extra tax from crossing the frozen threshold = £7,730 × (40% − 20%) = £1,546/year
If the threshold had risen to £62,000 with inflation, this worker would still be entirely in the basic-rate band.
Enter your salary to see your exact income tax, National Insurance and take-home pay — including how the frozen bands affect your bill.
Use the Income Tax Calculator →Fiscal drag affects almost every employed and self-employed worker in the UK, but its impact varies significantly by earnings level:
Workers in the public sector who received large pay rises following strike action in 2023 and 2024 were notably exposed to fiscal drag — their pay awards were partly absorbed by higher tax bills resulting from the frozen bands.
You cannot escape fiscal drag entirely, but there are legitimate ways to reduce its impact:
Salary sacrifice reduces your gross taxable income before PAYE is calculated. If fiscal drag has pushed your salary into a higher tax band, a salary sacrifice pension contribution can bring your taxable income back below the threshold, saving both income tax and National Insurance. A contribution of £7,730 — the amount above the frozen higher-rate threshold for a worker earning £58,000 — could keep you entirely in the basic-rate band, saving £1,546/year in income tax.
Read the full Salary Sacrifice Pension guide.
If your employer does not offer salary sacrifice, you can make personal pension contributions. You contribute net income and the pension provider claims back basic-rate tax relief (20%) from HMRC. Higher-rate taxpayers can then claim the remaining relief (an extra 20%) through Self Assessment.
Gift Aid donations reduce your adjusted net income for tax purposes. Higher-rate taxpayers can reclaim the difference between the higher rate and basic rate on Gift Aid donations through Self Assessment, reducing their income tax bill.
While ISA contributions do not reduce your current-year income tax bill, they shelter investment returns and savings interest from future tax — limiting the additional fiscal drag burden in later years as your wealth grows.
If one partner earns below the personal allowance, they can transfer up to £1,260 of their unused allowance to a basic-rate taxpayer spouse or civil partner, saving up to £252/year.
Important: Tax planning is personal. The strategies above can help, but their appropriateness depends on your individual circumstances. Speak to a qualified accountant or financial adviser if you are making significant financial decisions based on your tax position.