Frozen tax thresholds to 2030/31: why your pay rise is taxed harder than you think
Fiscal drag explained, the 60% trap above £100,000, and the legal ways to cut your taxable income
The Personal Allowance and the higher-rate threshold have not moved since April 2021 and are now frozen until 2030/31. With inflation at 3.1% and wages rising to match, every pay rise pushes more of your income into a higher band. This is fiscal drag, and it is the biggest tax rise most people will never see on a payslip. Here is what it costs you and what you can do about it.
What fiscal drag means for you
If thresholds rose with inflation, a 3% pay rise would leave your tax position roughly unchanged. With thresholds frozen, the same rise is taxed at your top rate, and each year more of your income sits above a line that has not moved.
Take someone on £48,000. A 4% rise takes them to £49,920, still under the higher-rate threshold. One more rise of the same size takes them to £51,917 and they become a higher-rate taxpayer, losing half their Personal Savings Allowance and paying 40% on the top slice. Nothing about their real living standard changed. The threshold simply stood still while prices rose.
| Band 2026/27 | Income | Income tax | Employee NI |
|---|---|---|---|
| Personal Allowance | Up to £12,570 | 0% | 0% |
| Basic rate | £12,571 to £50,270 | 20% | 8% |
| Higher rate | £50,271 to £125,140 | 40% | 2% |
| Additional rate | Over £125,140 | 45% | 2% |
Scotland sets its own income tax bands, though National Insurance is the same across the UK.
The 60% trap above £100,000
Between £100,000 and £125,140 the Personal Allowance is withdrawn at £1 for every £2 of income. So each extra £100 earned is taxed at 40% and also removes £50 of tax-free allowance, which is taxed at 40% too. The effective rate is 60%, and 62% once National Insurance is added.
This band has been frozen since 2010. Sixteen years of pay growth means many more people now fall into it, including senior nurses, teachers on leadership scales and mid-level managers. It also switches off Tax-Free Childcare and the free childcare hours, which require neither parent to earn over £100,000, so a family can lose thousands in childcare support on top of the tax.
Legal ways to reduce taxable income
None of these are loopholes. They are the normal rules, used deliberately. Pensions are regulated products, so this is information only, not personal advice.
Pension contributions. Money paid into a pension is deducted from your income before tax. A higher-rate taxpayer putting £1,000 into a pension gets £400 back in tax. Someone in the 60% band gets £600 back. If you earn £105,000 and contribute £5,000, your adjusted net income falls to £100,000 and your full Personal Allowance returns. The annual allowance is £60,000 for most people, and you can carry forward unused allowance from the previous three years.
Salary sacrifice. You agree a lower salary and your employer pays the difference into your pension. Because the salary is genuinely lower, you save income tax and National Insurance, and your employer saves 15% employer NI, which some pass on. Check the effect on mortgage applications, maternity pay and life cover, which are often based on your reduced salary.
Gift Aid. Donations to charity extend your basic-rate band by the gross amount given and reduce adjusted net income for the £100,000 taper and the Child Benefit charge. Keep records and claim the extra relief through self-assessment or by telling HMRC.
Other levers. Use your £20,000 ISA allowance so that interest and gains do not count as income. Couples can hold savings in the lower earner's name. Check your tax code, because an incorrect code can quietly tax you at the wrong rate all year.
Watch out for
- The Child Benefit charge starts at £60,000 of adjusted net income and is fully repaid at £80,000. Pension contributions reduce that figure too.
- Salary sacrifice cannot take you below the National Living Wage of £12.71 an hour.
- Pension money is locked until at least age 55, rising to 57 from 2028. Do not sacrifice cash you need next year.
- The Autumn Budget could change any of these rules. Thresholds are frozen by law until 2030/31, but reliefs are reviewed every year.
What to do next
Work out where a pay rise will land you. If it will take you over £50,270 or £100,000, ask your employer about salary sacrifice before the rise takes effect, and check your tax code in the HMRC app in the month the new salary arrives.