Frozen tax thresholds have resulted in an additional seven million individuals being pulled into the income tax net, according to recent analysis. In the 2025/26 tax year, there were 40 million income taxpayers, marking an increase of 1.3 million in just one year and a rise of 7 million since the thresholds were frozen in 2021/22.
Current Tax Thresholds
The personal allowance, the amount you can earn before paying tax, remains at £12,570. Earnings above this are subject to the basic 20% income tax rate. The higher 40% rate applies to earnings over £50,270, while the additional 45% rate kicks in above £125,140. In her Budget last November, Chancellor Rachel Reeves extended the freeze on these levels by another three years, meaning they will now not rise until 2031.
Understanding Fiscal Drag
This freezing of tax brackets is known as fiscal drag, a stealth tax that pulls more people into higher tax brackets as wages increase. It allows the government to collect more tax without raising rates. The number of income taxpayers is expected to keep rising until the freeze ends.
Expert Advice on Reducing Your Tax Bill
Sarah Coles, head of personal finance at AJ Bell, commented: "The fact that so many more people are paying tax – and at higher rates – means it’s worth considering ways to keep income tax to a minimum." She suggests several strategies:
- Pension contributions: Making contributions can provide tax relief at your highest marginal rate.
- Cash ISAs: Using a Cash ISA protects your savings interest from tax.
- Stocks and Shares ISAs: If changing tax brackets means paying more tax on investments, these ISAs shield you from dividend and capital gains tax.
Inheritance Tax Concerns
Inheritance tax also saw a rise, with 32,000 estates liable in 2025/26 – an increase of 5,000 since 2020/21. The number is expected to jump by a further 10,500 in 2027/28. Ms Coles added: "Inheritance tax still only affects those leaving large estates, especially if they are part of a married couple and leaving a property to children. However, 5,000 more estates than in 2020/21 are now getting a tax bill each year, so it’s worth considering whether you can make any gifts during your lifetime to reduce a potential tax bill."
