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Your Salary Went Up But Your Take-Home Didn't — Here's Why (2026/27)
7 min read
The UK government hasn't raised income tax rates. It hasn't needed to. Instead, it has done something subtler — it froze the thresholds at which those rates apply, and let rising wages do the work. This is fiscal drag, and it's costing the average worker between £150 and £300 per year in extra tax compared to what they'd have paid if thresholds had risen with inflation.
How the Freeze Works
Income tax thresholds used to rise every April in line with the Consumer Price Index (CPI). Since April 2022, the Personal Allowance has been locked at £12,570 and the Higher Rate Threshold at £50,270. These will stay frozen until at least April 2031 — a nine-year freeze. Meanwhile, wages have risen significantly. The result: your pay has gone up, your bands haven't, so a larger share of your income is now taxable.
The Real-World Numbers
If the Personal Allowance had risen with CPI since 2022, it would now sit at roughly £14,500. Instead, it's £12,570. Those extra £1,930 of your income are now taxed at 20% — costing you around £386 per year (£32/month) more than if thresholds had been index-linked.
The impact on higher earners is even greater. If the Higher Rate Threshold had risen with CPI, it would be approximately £57,000. With the freeze at £50,270, around 700,000 extra workers have been dragged into the 40% bracket who would otherwise remain basic rate taxpayers.
Who Is Hit Hardest?
- Workers near the £50,270 threshold — a pay rise that crosses this line means a sudden jump to 40% tax on the new portion.
- Those with frozen thresholds + student loans — rising wages pull more income above the student loan repayment threshold too.
- Scots — Scottish bands are also partially frozen, but the thresholds differ, creating a complex picture.
When Will It End?
Thresholds are legislated to stay frozen until April 2031. The OBR estimates the total revenue raised by the freeze will reach £25 billion per year by then. There's no political commitment to unfreeze them earlier. The only real protection is to reduce your taxable income through salary sacrifice pensions, ISAs, and tax-efficient benefits.
Frequently Asked Questions
Is fiscal drag the same as a tax rise?
Economically yes, politically no. The government can claim it hasn't raised tax rates — and that's technically true. But because wages have risen and thresholds haven't, the effective tax take has increased substantially. The IFS calls it a "stealth tax."
Can I do anything to avoid it?
The most effective tool is salary sacrifice into a workplace pension. Every £1 sacrificed reduces your taxable income pound for pound, meaning you can deliberately keep yourself below the £50,270 threshold even as your gross pay rises.
Does fiscal drag affect National Insurance too?
Yes. NI thresholds are also frozen. The Primary Threshold (£12,570/year) has been frozen since April 2022 alongside the income tax allowance, compounding the impact.
Use our Take-Home Pay Calculator to see exactly how much of your salary you're keeping in 2026/27 compared to previous years.