What is Fiscal Drag?
Fiscal drag is the stealth tax rise that happens when tax thresholds are frozen while wages rise — more of your income gets taxed, and at higher rates, without any headline rate going up.
How fiscal drag works
Tax bands used to rise with inflation each April. When they're frozen — as the £12,570 personal allowance and £50,270 higher-rate threshold have been since 2021, now extended to 2030/31 — every pay rise pushes more of your income into tax. You feel no change on Budget day, but each year the state quietly takes a bigger share. Economists call it the biggest tax rise of the era precisely because it never has to be announced.
A worked example
Say you earn £48,000 and get a 5% rise to £50,400. Your pay rose £2,400 — but £130 of it now sits above the frozen £50,270 threshold and is taxed at 40% plus 2% NI instead of 20% plus 8%. Repeat that for five more years of rises and you become a higher-rate taxpayer on a distinctly average professional salary: in the early 1990s about 1.7 million people paid 40% tax; the OBR projects around 8–9 million by the end of the freeze.
Why it matters now
Every party's tax pitch is really an argument about fiscal drag. Labour holds rates steady but keeps the freeze (the drag continues). Reform UK would reverse it in one jump with a £20,000 allowance. The Conservatives' Triple Lock Plus would end it for pensioners only — because the rising state pension is about to collide with the frozen allowance (see the state pension tax calculator).
Plain-English guide for general information only — not financial, legal or tax advice. Rates are 2026/27 unless stated. Last reviewed 5 July 2026.
Frequently asked questions
What does fiscal drag mean in simple terms?
It means tax thresholds staying still while wages rise, so a bigger slice of your income gets taxed each year — a tax rise that never has to be announced. The UK's main thresholds are frozen until 2030/31.
How much is fiscal drag costing me?
It depends on your pay rises. A worker crossing the frozen £50,270 threshold pays 40% tax plus 2% NI on income that would once have been taxed at 20% plus 8% — and the OBR expects millions more people to become taxpayers or higher-rate taxpayers by the end of the freeze.
Which thresholds are frozen?
The £12,570 personal allowance, the £50,270 higher-rate threshold and several others are frozen to 2030/31; the £100,000 allowance taper and £125,140 additional-rate threshold have never been indexed at all.