HMRC is set to demand approximately £700 from millions of UK households as a result of frozen tax thresholds. The personal allowance has remained fixed at £12,570 since April 6, 2021, leading to significant fiscal drag.
Impact on Basic-Rate Taxpayers
According to research by AJ Bell, fiscal drag is expected to cost basic-rate (20%) taxpayers up to £700 in the 2026/27 tax year alone, as the personal tax-free allowance has not increased with inflation. By the time thresholds are planned to rise again in 2030/31, that figure will climb to around £960.
Higher-rate (40%) taxpayers face even steeper costs. At 29.4 million, basic-rate taxpayers make up 80.1% of all taxpayers but account for only 29.9% of tax revenue. This group will pay as much as £3,500 more in tax in the 2026/27 tax year than if thresholds had kept pace with inflation.
By 2030/31, the higher-rate threshold should have approached £70,000 had it tracked inflation, but it is set to remain at just over £50,000, according to AJ Bell's analysis.
Expert Commentary
Laura Suter, director of personal finance at AJ Bell, stated: "The chancellor has doubled down on what was once the Conservatives’ brainchild: the income tax freeze is now firmly the ‘Reeves Freeze’, extended for another three years until 2031. The result is that every taxpayer in the country will see their wages quietly eroded by higher tax bills."
Ms. Suter added: "Nothing can make up for the lost years where income tax bands have seen no inflationary uplift. The cumulative cost is staggering: the OBR estimates it will cost taxpayers £56 billion a year by 2029-30, around £1,330 per taxpayer on average."
Mitigation Strategies
Andrew Prosser, head of investments at InvestEngine, suggested that increasing pension contributions can reduce tax bills and provide pension tax relief. He explained: "For higher-rate taxpayers, a £20,000 contribution can effectively cost just £12,000 once government and personal tax relief are applied, making careful planning more important than ever."
