2026/27 Tax Thresholds Are Still Frozen, Here's What the Freeze Quietly Costs You

The most effective tax rise of the last decade was one nobody had to vote for. Instead of putting rates up, successive governments simply froze the thresholds at which each rate kicks in, and left them there while wages climbed. It sounds like nothing. It is quietly enormous.

The thresholds that haven't moved

The two that matter most for ordinary earners have been frozen for years: the tax-free personal allowance at £12,570, and the point where higher-rate (40%) tax begins at £50,270. The additional-rate threshold sits at £125,140. In a normal world these would rise a little each year with inflation. They haven't.

How fiscal drag works

When your pay rises with inflation but the thresholds don't, more of your income crosses into taxable territory, and more of it crosses into the higher band. You feel no richer, because your pay rise only kept pace with prices, yet you hand over a bigger slice of it. The Treasury collects more without ever announcing a rise. Economists call it fiscal drag; you might call it a rise by stealth.

"A pay rise that merely keeps up with inflation can still push you into the 40% band. You're standing still and being taxed as if you climbed."

Who gets dragged

Two groups feel it most. People near £50,270 are pulled into higher-rate tax for the first time, and with it, their tax-free savings allowance halves from £1,000 to £500, and the tax rate on any dividends jumps sharply. And people near £100,000 hit the personal-allowance taper and its brutal 60% effective rate. Every year the freeze continues, a few more people join both groups.

What you can actually do

You can't unfreeze the thresholds, but you can lower the income the thresholds see. Pension contributions and salary sacrifice reduce your taxable income pound for pound, the same move that beats the 60% trap also softens fiscal drag lower down. Making full use of your ISA allowance shelters savings and investment returns from the shrinking tax-free allowances. None of it is exotic; it's just using the wrappers the system still gives you.

The freeze is a reminder of a wider truth: tax is not set-and-forget. The rules shift under your feet even when the headline numbers don't, which is exactly why keeping half an eye on them, and using the shelters available, is part of building wealth, not a distraction from it.

Compound provides general information, not financial advice. Tax depends on your circumstances and may change.