Millions of workers will pay more tax this year after another freeze on Income Tax thresholds is put in place this April.
The new tax year usually brings tax changes from His Majesty’s Revenue and Customs but this year, 2025-26, Chancellor Rachel Reeves chose to freeze Income Tax bands in England and Wales at the same rate they have been for years – at £12,570, £50,270 and £125,000. It means that more and more workers will be dragged into paying more and more tax as their wages are increased by their firms for inflation but the tax brackets are not.
Ed Monk, writing for financial firm Fidelity International, said that the higher tax bracket should actually be set at £75,000, not £50,270, if it had been increased in line with inflation but because it hasn’t, more people will end up with bigger tax bills.
He said: “In October 2024, Chancellor Rachel Reeves announced that Income Tax and National Insurance thresholds will remain frozen until the tax year 2027-28. At a time when wage inflation is soaring, the higher rate tax threshold will have remained at £50,270 for eight long years.
“And it could be longer. With worsening public finances, which will be highlighted in the Spring Statement next week (26 March), the government could consider extending the freeze in Income Tax thresholds.
“The drag effect of such freezes is significant. As our analysis shows, had the £50,270 higher rate threshold kept pace with rising wages over the past two and a half decades it would now be close to £75,000, and on track to be nearly £80,000 by 2028.
“To put it another way, someone earning twice the average wage in 2000 would have paid almost no higher-rate tax. Today, had their pay risen in line with average wages, 36% of their income would fall into the 40% rate.”
Fiscal drag means that as your pay increases over time – from annual inflation based pay adjustments, to promotions and job changes – you end up being pulled into higher tax bands.
For example, if you earned £45,000 in 2020, got a 5% pay rise, this would take you to £47,250, then got another 4% the next year, you’d be at £49,140, then another 3% would take you to £50,614 – and in just three years of annual pay rises, you’d be hitting the higher tax bracket, all the while the higher tax bracket has been frozen in place, waiting for you to catch up to it.
The same happens at the lower band, where people on low incomes start to pay tax when they hit £12,570, and the highest bracket, where people hit the £125,000 threshold, as both of these have also been frozen.
Ed continues with an example: “In 2000, Sally earned £32,785, equal to the higher rate threshold. Over the next 25 years, she stayed in the same role and her wages rose in line with average earnings. By 2025 she earned £74,986 – the increase reflects the rise in wages over 25 years, rather than feeling like a genuine pay rise.
“Now for her tax bill! In 2000, Sally paid no higher rate tax as her wages equaled the higher rate tax threshold. But now in 2025 she pays tax on 33% of her income, with a £24,716 gap between her income and the higher rate threshold. Despite no real pay rise, a big chunk of her wages has been pulled into higher rate tax.”
