What is fiscal drag?
Fiscal drag is when tax thresholds are frozen while wages rise, so more people are pulled into paying tax — or into higher tax bands — even though the headline tax rates never change.
How it works
Income tax thresholds (like the £12,570 personal allowance and the £50,270 higher-rate threshold) are normally raised with inflation. When they are frozen instead, pay rises push a growing share of your income above each threshold. The effect is a stealth tax rise: you pay more without any rate going up.
Why it matters now
The UK personal allowance and higher-rate threshold have been frozen since 2021, and the freeze has been extended to 2031. The Office for Budget Responsibility estimates the freeze pulls millions more people into paying tax, and hundreds of thousands into the 40% band, over the period.
Plain-English definition for general information only — not financial, legal or tax advice. Rates are 2025/26 unless stated.