Blog | by Josh Clarke | September 2026
The Stealth Tax: How Frozen Tax Thresholds Are Quietly Costing You More
Josh Clarke
A video doing the rounds on Instagram recently put a simple question to its followers: if £12,500 wasn't enough to live on tax-free back in 2010, why is roughly the same figure still the tax-free personal allowance today? The creator behind it sketched out, on a whiteboard, how the key markers in the UK income tax system have barely moved in well over a decade, even while prices, wages and the cost of living have kept climbing around them. It struck a nerve, and rightly so, because it points at something that affects almost every taxpayer in the country whether they have seen the video or not.
The technical name for what he was describing is fiscal drag, and it has quietly become one of the most effective tax rises in modern British history, precisely because no Chancellor ever has to stand up and announce it. Below, we have taken that idea and put real numbers to it: what four different salaries would have taken home when the current thresholds were first set, what those same salaries are worth today once you account for inflation, and how much of that increase the taxman has quietly kept for himself.
What is fiscal drag, and why do people call it a 'stealth tax'?
Fiscal drag happens whenever tax thresholds and allowances stay fixed while wages and prices rise around them. As pay increases, whether through a genuine pay rise or simply because inflation has pushed up the cost of everything from groceries to rent, more and more of it falls above a frozen personal allowance or into a frozen higher-rate band. Nobody has voted for a tax rise, no rate has changed on paper, yet the government collects a larger and larger share of everyone's income each year. Economists and official bodies including the Office for Budget Responsibility describe this precisely as a stealth tax, because its effect on the public finances can rival that of a headline rate increase, without ever appearing as one in a Budget speech.
The aIt matters because most people judge their financial position by looking at their payslip in isolation, rather than comparing it with where they stood several years ago in real terms. A salary that has gone up from £50,000 to £65,000 over five years feels like progress. Whether it actually is progress, once frozen thresholds and inflation are both taken into account, is a very different question, and one this article sets out to answer with worked figures rather than generalisations.
How long have UK tax thresholds actually been frozen?
The personal allowance and the higher rate threshold, currently £12,570 and £50,270 respectively, were last increased in April 2021. They were originally due to be unfrozen in April 2026, but that freeze has since been extended twice, most recently in the November 2025 Budget, which pushed the freeze all the way through to April 2031. By the time that freeze finally ends, both figures will have sat unchanged in cash terms for a full decade.
The additional rate threshold has fared even worse. It stood at £150,000 from its introduction in 2010/11 right through to April 2023, when the Autumn Statement 2022 cut it, rather than simply freezing it, to £125,140. That single change dragged a much wider band of higher earners into the 45% additional rate, and the reduced threshold has itself been frozen since.
Perhaps the starkest example is the £100,000 threshold at which the personal allowance begins to be withdrawn, and at which entitlement to tax-free childcare and 30 hours of free childcare also disappears. This figure was set at exactly £100,000 when it was introduced in April 2010 and, according to research by RSM UK, has never been increased once in the sixteen years since. The number of taxpayers caught by it has more than doubled over that time, from around 588,000 when it began to roughly 1.35 million by 2022/23, and RSM estimates the mechanism raised approximately £18.6 billion in income tax in the five years to April 2023 alone.
What would the thresholds be today if they had kept pace with inflation?
Consumer prices have risen substantially since these thresholds were last set. Using the Office for National Statistics' CPI all-items index, prices rose by roughly 29.8% between April 2021, when the personal allowance and higher rate threshold were last increased, and July 2026, the most recent reading available at the time of writing (the index moved from 110.1 to 142.9 over that period). Had the thresholds simply been uprated in line with that inflation, rather than frozen, the numbers would look very different today.
| Threshold | Frozen at | Would be today if uprated by CPI since April 2021 |
|---|---|---|
| Personal allowance | £12,570 | £16,315 |
| Higher rate threshold | £50,270 | £65,246 |
| Personal allowance taper / childcare cut-off? | £100,000 | £129,791 |
None of this is a call for any particular rate of tax. It is simply a description of how much ground these thresholds have lost in real terms, and therefore how much further a given salary now has to stretch before it reaches the same tax-free or basic-rate territory it used to.
Four salaries, worked through: what fiscal drag actually costs you
To make this concrete, we took four gross salaries and worked out take-home pay, after income tax and employee National Insurance, using the rates and thresholds that applied in 2021/22, the year the personal allowance and higher rate threshold were last set. We then increased each of those same salaries by the 29.8% CPI inflation figure above, to arrive at the salary someone would need today simply to have kept pace with the cost of living, and recalculated take-home pay under 2026/27 rules. Finally, we converted that 2026/27 take-home figure back into 2021 pounds, so the comparison is genuinely like-for-like rather than being distorted by inflation itself.
These figures assume a single employee on the standard tax code with no other income, pension contributions, student loan or benefits in kind, using published HMRC rates for England, Wales and Northern Ireland (Scottish rates differ, see the FAQ below). They are illustrative calculations, not personal tax advice.
| 2021/22 salary | 2021/22 take-home | Salary today, uprated by CPI | 2026/27 take-home (cash) | 2026/27 take-home in 2021 money | Real change |
|---|---|---|---|---|---|
| £25,000 | £20,662 | £32,448 | £26,882 | £20,712 | +0.2% |
| £50,000 | £37,662 | £64,896 | £48,197 | ££37,134 | -1.4% |
| £80,000 | £55,089 | £103,833 | £70,014 | £53,944 | -2.1% |
| £100,000 | £66,689 | £129,791 | £80,576 | £62,081 | -6.9% |
The pattern is telling. The £25,000 earner comes out almost exactly where they started in real terms, largely because employee National Insurance was cut significantly over this period, from 12% to 8% on the main band, which happens to benefit lower and middle earners more than the frozen personal allowance hurts them. But move up the income scale and the frozen thresholds start to dominate. The £50,000 earner, now sitting right at the frozen higher-rate threshold once their pay has simply tracked inflation, is worse off in real terms despite a materially larger payslip. The £80,000 earner loses more still. And the £100,000 earner, who needs almost £130,000 today just to have the same spending power they had in 2021, is nearly 7% worse off in real terms, because uprating their salary by inflation alone is enough to push them deep into the personal allowance taper that this article covers next.
Why does £100,000 do so much damage?
Once adjusted net income passes £100,000, the personal allowance is withdrawn at a rate of £1 for every £2 earned above that point, disappearing entirely by £125,140. Within that band, an individual effectively pays 60% on every additional pound earned, once the withdrawn allowance is factored in alongside income tax and National Insurance, well above the 45% additional rate that most people assume is the highest marginal rate in the system. For a Scottish taxpayer, where a 45% and 48% band now sit above the UK higher rate, the equivalent marginal rate inside this band can reach 67.5%.
The same £100,000 figure is also the cut-off for tax-free childcare and for 30 hours of free childcare in England, both of which are assessed on each parent's individual adjusted net income rather than household income. A parent who tips even slightly over the line, perhaps through a bonus, a pay rise, or investment income, does not just face a higher marginal tax rate; they can lose several thousand pounds of childcare support in the same tax year, all at once rather than gradually. Because the threshold has not moved since 2010, this is exactly the kind of cliff edge that catches out people who assume a modest pay rise can only ever leave them better off.
What can you actually do about it?
None of the above changes what HMRC will collect once income has been paid and received. What it does change is how you plan around it. A few of the more common, well-established approaches worth discussing with an accountant include:
1. Increasing pension contributions. Pension contributions reduce adjusted net income for the purposes of the £100,000 taper, so someone earning £110,000 who contributes £10,000 into a pension can, in effect, be treated as if they earned £100,000 for allowance and childcare purposes, recovering both the personal allowance and childcare entitlement while also getting tax relief on the contribution itself.
2. Using salary sacrifice arrangements, for example for pension contributions, cycle to work schemes or ultra-low emission company cars, which reduce gross pay before it is assessed for tax, National Insurance and the £100,000 threshold alike.
3. Making charitable donations under Gift Aid, which extends the basic rate band and reduces adjusted net income in a broadly similar way to a pension contribution.
4. For directors of their own companies, reviewing the balance of salary, dividends and pension contributions each year rather than leaving it on autopilot, since frozen thresholds change the arithmetic year on year even when nothing else about the business has changed.
5. Getting an adjusted net income calculation done before the end of each tax year, particularly where a bonus, benefit in kind or investment income might otherwise push earnings over £100,000 without anyone noticing until the tax return is filed.
Frequently asked questions
Will the frozen thresholds ever be increased?
At present, the personal allowance and higher rate threshold are confirmed as frozen until April 2031, following the extension announced in the November 2025 Budget. That is government policy rather than law set in stone, and a future Budget could in principle unfreeze, freeze further, or restructure the thresholds again, so this is a position worth revisiting each year rather than assuming permanently.
Does this affect Scottish taxpayers in the same way?
Scotland sets its own rates and bands for non-savings, non-dividend income, so the exact percentages and thresholds differ north of the border. However, the personal allowance and the £100,000 taper threshold are set at UK level and apply equally to Scottish taxpayers, which is why the marginal rate inside the £100,000 to £125,140 band can reach 67.5% in Scotland, higher than the 60% figure that applies elsewhere in the UK.
What actually counts towards the £100,000 for the personal allowance taper?
It is based on adjusted net income, not gross salary. Broadly, that means total taxable income from all sources, including bonuses, benefits in kind and investment income, less pension contributions and Gift Aid donations grossed up for basic rate tax. Two people on an identical salary can therefore sit on opposite sides of the £100,000 line depending on what else is happening in their finances that year.
Need help?
If you think frozen thresholds, the £100,000 taper or the loss of childcare support might be affecting you or your business this year, it is worth getting a proper adjusted net income calculation done rather than guessing. Speak to your usual contact at Love Your Accountants, or email Rob directly at rob@loveyouraccountants.com, and we can walk through pension, salary and dividend planning options tailored to your situation before the end of the tax year rather than after it.
Book a free consultation: https://loveyouraccountants.com/contact.
Sources
● ONS, CPI Index 00: All Items 2015=100 (D7BT), Consumer price inflation time series dataset
● ONS, Consumer price inflation, UK: July 2026
● ONS, Consumer price inflation, UK: April 2021
● House of Commons Library, Direct taxes: rates and allowances 2021/22 (CBP-9146)
● House of Commons Library, Direct taxes: rates and allowances for 2026/27 (CBP-10618)
● GOV.UK, National Insurance rates and categories
● ICAEW, Budget: Freeze on personal allowance extended (November 2025)
● RSM UK, The true cost of the personal allowance stealth tax
● Deloitte Taxscape, Income tax additional rate threshold decreased, Autumn Statement 2022
Author
Josh Clarke
Josh is our Chief Operating Officer, overseeing operations to ensure a smooth, responsive and high-quality service. With a practical, clear approach...
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