Income Tax Thresholds Frozen Until 2031 — The £55 Billion Stealth Tax

The Longest Tax Threshold Freeze in Modern History

The personal allowance has been stuck at £12,570 since April 2021. The higher rate threshold has sat at £50,270 since the same date. Originally due to unfreeze in April 2026, the government extended the freeze to at least April 2028 — and the Office for Budget Responsibility projects no meaningful adjustment until 2030/31 at the earliest.

That makes this a decade-long freeze spanning the highest period of inflation the UK has experienced since the 1980s. By the time thresholds move again, cumulative CPI inflation since 2021 will have eroded their real value by roughly 30%.

This is the single largest revenue raiser in the current fiscal plan, expected to generate over £55 billion by 2029/30. It works quietly, automatically, and with no legislation required — which is exactly why it is so effective.

What Is Fiscal Drag?

Fiscal drag is the mechanism by which inflation pushes people into higher tax brackets even though their real purchasing power has not increased.

Here is a simple illustration:

• In 2021, you earned £50,000. You paid higher-rate tax on £0 of that income (the threshold was £50,270)
• By 2026, your salary has risen with inflation to £58,000. You now pay 40% tax on £7,730 of income
• Your real purchasing power is essentially the same — but your tax bill has increased by over £3,000

You are not richer. Prices have risen and your pay has kept pace. Yet HMRC takes a larger share because the thresholds have not moved.

The OBR estimates that by 2029/30, an additional 780,000 people will have been pulled into paying income tax, and 530,000 more will have moved into the higher rate band — purely because of frozen thresholds.

The Numbers: What the Freeze Costs You

Personal Allowance: £12,570

If the personal allowance had risen with CPI since 2021, it would be approximately £15,400 by 2026/27. The gap of £2,830 costs every taxpayer an additional £566 per year in basic rate tax (£2,830 x 20%).

By 2030/31, the gap is projected to reach roughly £4,500 — costing £900 per year compared to an inflation-adjusted allowance.

Higher Rate Threshold: £50,270

An inflation-adjusted higher rate threshold would be approximately £61,500 by 2026/27. Anyone earning between £50,270 and £61,500 is paying 40% tax on income that would have been taxed at 20% under indexed thresholds. That is an additional 20% on up to £11,230, costing up to £2,246 per year.

Combined Impact by 2030/31

For a director earning £60,000 in total income:

And this is before considering dividend tax increases and the reduction in dividend allowance that compound the effect.

What This Means for Company Directors

Your Salary Strategy Needs Updating

Most directors of small limited companies pay themselves a combination of a low salary and dividends. The standard advice has been to set your salary at the NI Primary Threshold (currently £12,570) to maximise tax efficiency.

That number has not changed since 2021 — and will not change until at least 2028. In isolation, this seems like stability. But in practice, it means the tax-efficient salary figure is being eroded by inflation each year.

If you are drawing additional income through dividends, the frozen higher rate threshold at £50,270 means you hit 33.75% dividend tax (rising to 34.35% from April 2026) earlier in real terms than you would under indexed thresholds.

Dividend Planning Is More Important Than Ever

With the personal allowance frozen, the higher rate threshold frozen, the dividend allowance reduced to £500, and the dividend tax rate rising, the window of tax-efficient income extraction from your company is narrower than it has ever been.

Consider this scenario for 2026/27:

• Salary: £12,570 (covered by personal allowance — no income tax)
• Dividends: £37,700
• Total income: £50,270 (exactly at the higher rate threshold)

Every pound of dividends above £37,700 is taxed at the higher dividend rate of 34.35%. If thresholds had been indexed, you would have roughly £11,000 more headroom before hitting the higher rate.

Use the AccountsOS salary and dividend calculator to model the optimal split for your specific circumstances.

The £100,000 Trap Gets Wider

The personal allowance taper — where you lose £1 for every £2 of income above £100,000 — remains anchored at £100,000. This was set in 2010 and has never been adjusted. The effective marginal rate in this band is 60% (or higher when accounting for lost child benefit and pension taper).

With wage inflation, more directors are being caught by this trap. In 2010, earning £100,000 put you in the top 2% of earners. Today, it barely places you in the top 5%. Yet the same punitive tax treatment applies.

If your total income is between £100,000 and £125,140, you should be actively planning to reduce taxable income through pension contributions, which remain one of the few effective mitigations.

How Other Taxes Compound the Problem

The threshold freeze does not exist in isolation. Alongside it:

• Dividend tax rates are rising — the higher rate goes to 34.35% from April 2026, detailed in our dividend tax article
• Employer NI increased to 15% — raising the cost of salary extraction, as covered in our employer NI analysis
• Corporation tax sits at 25% — the highest rate since 2010
• Capital gains tax rates have risen — BADR is moving to 18%

Each of these individually would be manageable. Together, they represent a significant tightening of the tax environment for small company directors. The frozen thresholds are the foundation that makes all the other increases bite harder.

What You Should Do

1. Review Your Extraction Strategy Annually

Do not set your salary and dividends once and forget them. The interaction between frozen thresholds, changing dividend rates, and employer NI means the optimal split shifts each year. Run the numbers for 2026/27 specifically.

2. Maximise Pension Contributions

Pension contributions remain the most effective way to reduce taxable income. They are particularly valuable if you are in the £100,000-£125,140 band or if you are just above the higher rate threshold. The annual allowance is £60,000 (including employer contributions), and you can carry forward up to three years of unused allowance.

3. Use Your Full ISA Allowance

The £20,000 ISA allowance shelters investment returns from both income tax and capital gains tax. If you are accumulating surplus cash in your company, consider whether extracting it (tax-efficiently) and investing through an ISA makes sense for your long-term position.

4. Consider Timing of Income

If you can control when income is recognised — for example, by timing dividend declarations or invoicing — you may be able to smooth income across tax years to avoid tipping into higher rate bands. This is particularly relevant around the £50,270 higher rate threshold and the £100,000 personal allowance taper.

Key Dates

The Long Game

The threshold freeze is not dramatic. There is no single moment where it bites. It works gradually, year after year, quietly increasing your tax bill without any legislation, any announcement, or any line on your payslip that says "stealth tax."

That is precisely why it requires active planning. The directors who review their salary and dividend strategy each year, maximise their pension contributions, and stay aware of the thresholds will pay significantly less tax over the decade than those who set and forget.

AccountsOS models your optimal salary and dividend split automatically, factoring in frozen thresholds, current rates, and your company's specific financial position.

Frequently Asked Questions

Will the personal allowance definitely stay frozen until 2031?

The government has legislated the freeze until April 2028. Beyond that, the OBR forecasts assume thresholds remain frozen until 2030/31, though this depends on future fiscal policy. No government has committed to unfreezing them on a specific date, so the practical advice is to plan as if they will remain frozen for the foreseeable future.

Does the threshold freeze affect my company's corporation tax?

Not directly. Corporation tax rates and thresholds are separate from income tax. However, the freeze affects how much it costs you personally to extract money from your company — making the interaction between corporation tax, income tax, and dividend tax more important to model correctly.

Am I better off taking a higher salary now that thresholds are frozen?

Not necessarily. The optimal salary for most directors remains at or near the NI Primary Threshold (£12,570 for 2026/27). Taking a higher salary triggers both employee NI at 8% and employer NI at 15%, which usually outweighs the income tax benefit. The optimal salary article covers the full calculation.

How much extra tax will I pay over the full freeze period?

For a director earning £60,000 in total income, the cumulative additional tax from frozen thresholds (compared to CPI-indexed thresholds) is estimated at roughly £15,000-£20,000 over the 2021-2031 period. The exact figure depends on actual inflation and your specific income profile.