Fiscal drag occurs when tax thresholds don’t increase in line with inflation and wage growth.

Income Tax thresholds have remained static since 2022/23.
 
As chancellor Rachel Reeves confirmed that Income Tax thresholds would remain frozen until at least 2030/31 in the Spring Statement, you could be one of millions of UK taxpayers likely to pay more tax on your earnings.

While it may seem easy to shrug off (because it’s not a direct tax increase), the number of people paying either higher- or additional-rate tax will have increased from 15% in 2021/22 to 24% by 2030/31. [1]
 
Stealth taxes could be costing more than you think – especially if you’re a high earner

Research suggests that extending the frozen Income Tax threshold for a further three years could cost taxpayers as much as £1,292 more than might have been the case had the freeze ended in 2028, as originally planned. 

And the hit won’t be spread equally.
 
While someone with an annual income of £15,000 will face paying £259 in extra tax over the three-year extension period, if you earn £47,000, you could end up paying £1,292 more tax. [2]
 
3 smart ways to protect your finances from fiscal drag

In the current climate, there’s little you can do to change fiscal drag, but there are steps you could take to lessen its impact on your finances. 

1. Use your ISA allowance

Money you save into an ISA will grow free of tax, and when you come to withdraw your money, you don’t pay Income Tax or Capital Gains Tax.

In 2026/27, you can save up to £20,000 into a Stocks and Shares ISA, or split it between other types of ISA you may hold. Couples planning together could save up to £40,000 in ISAs each year.
 
Saving through an ISA wrapper could reduce the chance of having to pay tax on the interest you earn. Although the Personal Savings Allowance (PSA) offers some protection, any interest over the following thresholds could be subject to tax.

• Basic-rate taxpayers: £1,000 tax-free interest.
• Higher-rate taxpayers: £500 tax-free interest.
• Additional-rate taxpayers: £0 – all interest earned is taxable at 45%.

From April 2027, the rate of tax payable on savings income above these thresholds will increase by 2% across all tax bands to 22%, 42%, and 47%, respectively. The government estimates that these increases will raise £505 million in the 2030/31 tax year. [3]

2. Boost your pension contributions

Contributing more to your pension could help to reduce your taxable income.

The Annual Allowance typically allows you to receive tax relief on contributions up to 100% of your earnings or £60,000 – whichever is lower (2026/27).

For every £80 you contribute, the government tops it up to £100. If you’re a higher- or additional-rate taxpayer, remember to claim your extra relief through Self Assessment.

Read more: Are you leaving money on the table? How to claim all the pension tax relief you’re owed

You can also roll over any unused allowance from the past three years and still claim tax relief. This could help you make the most of tax savings now and boost your pot so you can enjoy more financial security when you retire.

3. Consider salary sacrifice

Another effective way to lessen the effects of fiscal drag on your finances is through salary sacrifice – if your employer offers it.

Depending on scheme rules, you could use salary sacrifice for childcare vouchers, a company car, or cycle-to-work schemes. Another popular option is to use salary sacrifice to pay more into your pension.

Contributions are taken from your salary, reducing your earned income – meaning you end up paying less Income Tax and National Insurance contributions (NICs).
 
In fact, thanks to lower NICs and Income Tax, you may find that your take-home actually rises.

Make the most of salary sacrifice while you still can – because from April 2029, the amount you can pay into your pension through such schemes will be limited to £2,000.

Get in touch

For personal advice about the steps you could take to protect your finances from the negative effects of fiscal drag, please get in touch.

Email [email protected] or call us on 0800 048 0150.

Please note
The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation for any investment or retirement strategy.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
 
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
 
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 
Workplace pensions are regulated by The Pensions Regulator.
The Financial Conduct Authority does not regulate tax planning.