The personal allowance has been held at £12,570 and the higher‑rate threshold at £50,270 since April 2021, with plans to keep them frozen until 2030/31. This means that as earnings grow, people move into higher tax brackets sooner. For example, if wages rise in line with ONS projections of around 4.1% a year, someone earning £45,000 today could find themselves paying higher‑rate tax within about three years.
The Office for Budget Responsibility estimates that these freezes will create 4 million new income‑taxpayers, 3 million new higher‑rate taxpayers and 400,000 new additional‑rate taxpayers by 2028/29. By 2027/28, the policy is expected to raise additional funds around £42.9bn a year, rising towards £55bn by 2030/31 if extended. It’s highly effective for the Treasury, but it places a growing burden on individuals.
There are, however, practical steps you can take. Pension contributions are one of the most effective tools available. They reduce your adjusted net income—the figure used to determine your tax position—which can help you avoid moving into a higher band. For example, paying a gross pension contribution of £10,000 effectively extends the higher rate threshold from £50,270 to £60,270, raising the point at which 40% tax is paid. In addition, with basic rate tax relief, this contribution would cost £8,000 in net contributions.
This strategy is especially valuable for those close to the 60% effective tax rate that applies between £100,000 and £125,140, where the personal allowance is withdrawn. Pension contributions also benefit from tax relief and tax‑free investment growth, meaning that in some cases every £1 contributed may effectively cost as little as 55p.
Parents can use the same approach to manage exposure to the High‑Income Child Benefit Charge, which begins at £60,000 and removes 1% of Child Benefit for every £200 of income until it is fully withdrawn at £80,000. Reducing adjusted net income through pension contributions can help preserve this benefit.
The broader point is that fiscal drag isn’t accidental—it’s a deliberate policy choice that works quietly in the background. But it doesn’t have to be passively accepted. With thoughtful planning, particularly around pension contributions and income management, it’s possible to offset much of its impact and even turn it to your advantage. And while making extra pension contributions may not always feel appealing in the moment, the long‑term benefits can be substantial.