Income tax threshold freeze keeps pressure on take-home pay

Income tax thresholds are set to remain frozen after John Healey’s first budget as chancellor, according to the Guardian, continuing a policy that increases the tax burden as earnings rise. Workers can consequently lose purchasing power even when their pay increases match inflation.

The mechanism is known as fiscal drag: tax-free allowances and the boundaries between tax bands stay fixed while incomes grow. More earnings become taxable, or fall into a higher band, without the government needing to raise headline income tax rates.

The freeze has developed through successive budget decisions rather than a single announcement. The House of Commons Library says it was initially announced in 2021, extended in 2022 and prolonged again in the 2025 budget, leaving the personal allowance frozen through the 2030–31 tax year.

Government guidance puts the standard personal allowance at £12,570. For earnings in England, Wales and Northern Ireland, the basic rate is 20% up to £50,270, the higher rate is 40% above that level up to £125,140, and the additional rate is 45% above £125,140; Scotland has different income tax bands.

Crossing a threshold does not mean every pound of earnings becomes subject to the higher rate. Income tax applies in bands, so only the portion falling within a particular band attracts its rate. The effect of a pay rise therefore depends partly on where someone’s earnings sit relative to those boundaries.

Higher earners face another complication because the personal allowance is withdrawn as adjusted net income rises above £100,000. Government guidance says it falls by £1 for every £2 above that level and disappears at £125,140. That withdrawal makes the calculation more complex than simply applying the published tax bands.

For households, the important distinction is between a larger cash pay packet and improved spending power. A pay rise that only compensates for inflation does not increase gross earnings in real terms. If frozen thresholds also increase the share taken in income tax, the money left after tax may buy less than before.

There is no single answer to how much extra an individual will pay. That requires their income, relevant allowances and assumptions about future earnings, alongside a comparison with what tax would have been if thresholds had increased. The cost of the freeze is that difference, not necessarily the whole increase in someone’s tax bill.

The Office for Budget Responsibility’s November 2025 assessment illustrates the longer-term scale. It projected that inflation-linked increases would have left the personal allowance £4,900 higher and the higher-rate threshold £20,100 higher by 2030–31. Those figures describe the difference in thresholds, not an individual taxpayer’s additional bill.

The next question for households is how earnings and prices develop over the remaining years of the freeze. Further nominal pay growth would expose more income to tax while the thresholds stay unchanged. The eventual impact will depend on those economic conditions and whether a future budget changes the policy.