Income tax burden could rise by £3,612 if thresholds frozen to 2030
Amid Spring Statement rumours, new interactive investor analysis suggests that taxpayers could pay thousands of pounds more in income tax if the freeze on tax thresholds is extended by another two years.
24th March 2025 16:19
by Myron Jobson from interactive investor
- The average earner (£35,000) could face a £416 higher tax bill due to fiscal drag
- The additional tax burden rises to £1,248 and £3,612 for those earning £50,000 and £100,000, respectively.
- These figures assume a 5.8% increase in wages for the upcoming tax year (2025-26), based on the latest ONS data, with wage growth continuing in line with the Office for Budget Responsibility’s annual inflation forecast until 2030.
Amid rumours that Chancellor Rachel Reeves may consider extending ‘fiscal drag’ in the upcoming Spring Statement, new calculations by interactive investor suggest that taxpayers could pay thousands of pounds more in income tax if the freeze on tax thresholds is extended by another two years.
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The freeze on the personal allowance at £12,570, combined with wage inflation, means more people will pay higher taxes in the coming years - an effect known as fiscal drag. This is the ultimate stealth tax, as many people may not realise they are paying more simply due to inflation.
The freeze on income tax thresholds is currently set to end in April 2028, but if extended to April 2030, the average earner (£35,000) could face a £416 higher tax bill due to fiscal drag. The additional tax burden rises to £1,248 and £3,612 for those earning £50,000 and £100,000, respectively.
These figures assume a 5.8% increase in wages for the upcoming tax year (2025-26), based on the latest ONS data, with wage growth continuing in line with the Office for Budget Responsibility’s annual inflation forecast until 2030.
Over the additional two-year period alone, the extra tax paid amounts to £223 for someone earning £35,000, £670 for those earning £50,000 and £80,000, and £1,939 for those earning £100,000.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Fiscal drag is the stealthy tax grab that few see coming. As wages rise with inflation but tax thresholds remain frozen, more people find themselves paying higher tax rates - even if their spending power hasn’t actually improved. It’s like being quietly nudged into a higher tax band without ever feeling richer.
“With the personal allowance and higher-rate threshold frozen until 2028 - and possibly beyond - millions will be caught in the net, making it a lucrative, if sneaky, way for the government to boost its coffers without making headline tax hikes.
“On top of already announced cuts to welfare spending and civil service running costs, it appears that a bitter cocktail of spending cuts and (stealth) tax rises is on the table to restore public finances - even if the tax threshold freeze is not extended.”
Salary in 2025 | Tax by 2030 with fiscal drag | Tax by 2030 without fiscal drag | Difference | Cost of extra two years from 2028-30 |
£35,000 | £7,858 | £7,442 | £416 | £223 |
£50,000 | £13,823 | £12,575 | £1,248 | £670 |
£80,000 | £28,452 | £27,203 | £1,248 | £670 |
£100,000 | £41,423 | £37,811 | £3,612 | £1,939 |
Source: interactive investor. Assumptions - wage inflation for 2025 in line latest ONS figures, following years in line with OBR forecast, tax without fiscal drag based on thresholds increasing in line with CPI based on OBR forecasts
How to beat fiscal drag through pension contributions
Myron Jobson says: “Increasing your pension contributions isn’t just good for your retirement - it also lowers your taxable income, helping you stay out of higher tax bands. Higher and additional rate taxpayers can also claim extra tax relief.
“Topping up your pension through salary sacrifice is a double win - it reduces your taxable income, helping you avoid fiscal drag, while also cutting your National Insurance (NI) bill.
“Workers might be able to top up their pension through salary sacrifice, which helps mitigate fiscal drag by reducing taxable income while also lowering NI contributions. With salary sacrifice, instead of receiving part of your salary (and being taxed on it), you agree with your employer to divert that portion straight into your pension. Since your gross salary is lower, both income tax and NI contributions are reduced before you even get paid.
“For high earners, pension contributions can also reduce their adjusted net income, helping them avoid tax cliff edges - such as the punitive 60% effective tax rate that applies to those earning between £100,000 and £125,140, where the personal allowance is gradually withdrawn.
“For parents, this strategy could also help them remain eligible for the government’s Free Childcare and Tax-Free Childcare schemes.
“For those at risk of losing child benefit due to the High Income Child Benefit Charge (£60,000 threshold), pension contributions can reduce their adjusted net income and help keep their benefits intact.”
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