💳
What is National Insurance and why are you paying it?
6 min read
In 2021, the government froze income tax thresholds. It was billed as a temporary measure. Five years later, with an extension to 2031 confirmed in the 2025 Autumn Budget, fiscal drag has become one of the most significant — and least discussed — tax increases in modern UK history.
The result: millions of people are paying more income tax every year, despite no change in the headline tax rates. They're being pushed into higher bands simply because their wages are rising with inflation while the bands stay still.
What is fiscal drag?
Fiscal drag is what happens when tax thresholds are frozen while wages rise. In normal times, the personal allowance and band thresholds would increase in line with inflation each year, keeping your real (after-inflation) tax bill roughly stable. When thresholds are frozen, every inflation-driven pay rise increases the proportion of your income going to tax.
The personal allowance has been fixed at £12,570 since April 2022. It will stay there until at least April 2031 — a nine-year freeze. In that time, inflation has eroded its real value by over 25%. That means you're now paying tax on income that, in real terms, was previously inside your tax-free allowance.
How much is it costing you right now?
The IFS estimates that by 2027/28, the freeze will cost a median earner roughly £1,200 more per year in income tax compared to what they'd have paid if thresholds had risen with inflation. For those near the higher rate threshold, the number is higher.
Here's the impact at different salary levels:
| Annual salary | Extra tax vs. index-linked thresholds (2026) | Monthly cost |
|---|---|---|
| £25,000 | ~£485/year | ~£40/month |
| £35,000 | ~£685/year | ~£57/month |
| £50,000 | ~£985/year | ~£82/month |
| £60,000 | ~£1,585/year | ~£132/month |
| £80,000 | ~£2,185/year | ~£182/month |
The 40% trap: more workers than ever paying higher rate tax
The higher rate threshold is stuck at £50,270. As wages rise, more and more workers cross this line — not because they're particularly high earners, but because inflation has pushed their nominal wages up. The OBR forecasts that one million additional workers will enter the 40% band by 2028 purely because of the threshold freeze.
If you earn between £45,000 and £60,000, pay close attention to your payslip every time you get a pay rise. If a raise pushes you above £50,270 even briefly (due to a bonus, for example), you may suddenly face a 40% marginal rate on that portion of income instead of 20%.
What you can legally do to protect yourself
1. Pension contributions — the most effective tool
Every pound you contribute to a pension (especially via salary sacrifice) reduces your taxable income pound for pound. If you're close to the £50,270 higher rate threshold, contributing the difference into your pension keeps you in the basic rate band entirely — saving 40% tax instead of 20% on that contribution. That's a 40p saving on every £1 contributed.
2. ISA contributions
The ISA allowance remains £20,000 per year. Interest, dividends, and growth inside an ISA are completely tax-free. With savings rates still at reasonable levels, filling your ISA before a taxable savings account means that income never appears in an HMRC coding notice.
3. Marriage Allowance
If one partner earns below the personal allowance (£12,570) and the other pays basic rate tax, transferring £1,260 of the unused allowance saves the basic rate taxpayer £252 per year. Around 2 million eligible couples still haven't claimed this.
4. Charitable giving through Gift Aid
If you're a higher rate taxpayer, Gift Aid donations generate an additional 20% tax relief (beyond the 20% already added for the charity). A £100 donation costs a 40% taxpayer only £60 after claiming higher rate relief through self-assessment.
When will the thresholds unfreeze?
The personal allowance and basic rate threshold are currently legislated to remain frozen until April 2031. There has been no confirmed plan to unfreeze them earlier, and with the OBR noting the freeze will raise £23 billion by 2030/31, the fiscal incentive to maintain it is significant.
Frequently asked questions
How do I know if fiscal drag has pushed me into the 40% band?
If your gross annual earnings exceed £50,270 — including any bonuses — you're in the higher rate band for that portion. Check your payslip: if you see a "higher rate tax" line or your monthly income tax is noticeably higher after a pay rise, this may be why.
Does fiscal drag affect National Insurance too?
Yes. NI thresholds are also frozen. The £12,570 Primary Threshold has been frozen since April 2022. As wages rise, more of your income is NI-liable at 8%.
Is Scotland affected differently?
Scottish income tax rates and bands are set by the Scottish Government. Scottish higher rate kicks in at £43,662 — lower than England's £50,270 — meaning Scottish workers face a higher marginal rate at a lower income. The freeze on the personal allowance affects Scotland the same way as England.
Can I get the money back?
Fiscal drag is not an error — it's deliberate policy. There's no refund mechanism. The only way to reduce the impact is to lower your taxable income through legitimate means (pension, ISA, etc.) as described above.
Run your numbers with our take-home pay calculator to see exactly how much of your salary you're keeping — and whether adjusting your pension contribution could make a meaningful difference.