The 2025 Budget confirmed that key UK income-tax thresholds, including the personal allowance and the basic and higher-rate thresholds, will remain frozen until at least 2030–31.
This means that, as wages rise with inflation or career progression, more of your income may be taxed at higher rates, a phenomenon often called “fiscal drag.” In practical terms, even if your salary grows, your take-home pay may not increase as much as you expect.
Why the Tax Threshold Freeze Matters
More of Your Income Gets Taxed
Because thresholds are frozen, wage increases can push you into higher tax bands or reduce the benefits of the personal allowance. This increases your effective tax rate, even though the headline rates (20%, 40%, 45%) haven’t changed.
More People Pay Tax
Part-time and lower-wage earners who previously earned below the personal allowance may now start paying income tax sooner. Over time, a larger share of workers will find themselves in higher-rate bands.
Reduced Disposable Income
With more income going to tax, households may have less left for spending, saving, or investing. This can affect budgets, long-term financial goals, and even your ability to keep up with living costs.
Who Feels It Most
| Group | Impact |
|---|---|
| Middle earners | Wage increases may push them into higher tax bands, reducing take-home pay |
| High earners | Additional thousands in tax as more income falls into the 40% or 45% bands |
| Part-time/minimum wage workers | Even modest pay rises could trigger new tax liabilities |
| Households trying to save | Less disposable income means less room for savings or investments |
What You Should Consider
- Adjust Take-Home Pay Expectations
Don’t assume that salary increases will translate into bigger pay packets. - Reassess Your Budget and Savings
Ensure essential spending and savings goals account for higher effective taxes. - Explore Tax-Efficient Saving
ISAs, pensions, and other tax-advantaged vehicles could become even more important. - Plan Long-Term
Factor fiscal drag into your financial planning, nominal pay growth may not equal real take-home growth.
Why This Is Called a “Stealth Tax”
Although headline tax rates haven’t risen, frozen thresholds quietly increase the amount of tax individuals pay. Wage inflation pushes people into higher bands while their real income doesn’t increase significantly, reducing disposable income without an overt tax hike.
Final Thoughts
Extending the tax threshold freeze until 2030–31 is a significant change for UK households. It impacts take-home pay, savings, and long-term financial planning. If you earn a salary, whether modest, average, or high, now is the time to review budgets, savings strategies, and financial goals to plan for a future where pay rises don’t automatically translate into more disposable income.
Calculate what the threshold freeze will mean for your take-home pay
Fiscal-Drag Pay Calculator
Estimate how freezing tax thresholds affects your net income over time.
