Why frozen income tax thresholds matter – and how to reduce their impact

If it feels like more of your income is being swallowed up by tax – even though tax rates haven’t changed – you’re not imagining it.

Income tax thresholds have been fixed – or “frozen” – at the same levels for several years. As income rises over time, more people find themselves paying higher rates of tax or losing access to certain benefits along the way.

Understanding how frozen thresholds work – and what you can do to plan around them – can help you take steps to reduce their impact.

What does “frozen income tax thresholds” mean?

Income tax thresholds are the levels at which you start paying tax or start paying it at a higher rate.

These thresholds used to rise every year in line with inflation¹, which stopped people paying more tax just because the cost of living – and therefore their income – had gone up. However, they’ve been frozen at their current levels since 2021, and the chancellor announced in last year’s Budget that the freeze would continue until April 2031. This means²:

• the personal allowance – the amount of tax-free income you can earn each year – stays at £12,570

• the higher-rate tax threshold, where income starts being taxed at 40%, remains at £50,270

• the additional-rate threshold, where income is taxed at 45%, stays at £125,140

If these thresholds had risen in line with inflation, they would be around £15,860, £63,430 and £157,900 today, according to the Bank of England’s inflation calculator³.

Why frozen tax thresholds matter so much

Frozen income tax thresholds increase how much tax people pay over time, often without it being immediately obvious. Some of the ways this may affect you include:

Paying income tax at a higher rate

When income tax thresholds are frozen, pay rises or increases in retirement income can push more people into higher tax bands. This can mean:

• starting to pay income tax sooner, or

• paying 40% tax on part of your income when you previously paid 20%

This can happen even if your income has only risen to keep pace with the cost of living.

Paying higher tax on your investments

Once you move into the higher-rate tax band, you’ll pay more tax on savings and investments held outside an individual savings account (ISA).

For example, capital gains tax (CGT) – a tax on profits you make when you sell investments – is 18% for basic-rate taxpayers and 24% for higher-rate and additional-rate taxpayers, on gains above the £3,000 annual allowance.

Dividend⁴ income above the £500 dividend allowance is taxed at 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.

Losing your personal allowance or childcare support

There’s another, less well-known threshold that can have significant implications for higher earners. If your income goes above £100,000, it can trigger two sharp changes in your finances:

1. Your personal allowance starts to reduce

For every £2 you earn over £100,000, you lose £1 of your personal allowance. It means income between £100,000 and £125,140 is taxed at an effective rate of 60%.

2. You lose access to tax‑free childcare and additional free hours

If you have children and start earning more than £100,000, you’ll no longer be eligible for tax-free childcare or 30 hours of free childcare per week⁵. Exceeding the limit by just £1 could mean missing out on thousands of pounds a year in government support.

Paying the high-income child benefit charge

There are other income‑linked charges that can affect families with children.

One example is the high-income child benefit charge. If you or your partner earns more than £60,000 a year, you’ll have to pay some of your child benefit back. If either of you earn more than £80,000, you pay all of it back.

While this threshold has increased recently, it can still create a cliff‑edge effect for people with children.

Ways to reduce the impact of frozen income tax thresholds

While you can’t control tax policy, there are steps that may help reduce how much frozen income tax thresholds affect you.

Use ISAs to shelter your savings and investments

One way to reduce the impact of frozen income tax thresholds is to invest through an ISA.

Income from investments in an ISA is completely tax free, which means it won’t push you into a higher tax bracket or increase your income tax bill.

You also don’t pay CGT on profits earned within an ISA, so all investment growth is sheltered from tax.

Save into a pension to reduce your taxable income

Pensions are particularly powerful when tax thresholds are frozen. This is because pension contributions reduce your taxable income, which may help you move back into a lower tax band.

Pension contributions can be especially helpful around the £100,000 mark. For example, if your income is £105,000, you would normally start losing your personal allowance and eligibility for tax-free childcare. But a £5,000 pension contribution could reduce your taxable income back to £100,000 – potentially preserving your full personal allowance and helping you keep access to childcare support.

The same principle applies to the high-income child benefit charge. Making pension contributions to lower your taxable income could help limit how much child benefit is clawed back.

It’s important to remember that money paid into a pension is intended for later life and is generally locked away until at least age 55 (rising to 57 from 2028). It’s worth considering your broader financial needs before increasing contributions.

Planning ahead as your income rises

Frozen tax thresholds mean forward planning matters more than it used to – particularly if your income is growing gradually.

It can help to:

• understand which income tax thresholds are relevant to you

• keep an eye on how close you are to them

• think about tax efficiency when deciding how and where to save or invest

Small, regular actions – such as making use of annual pension and ISA allowances – can make a meaningful difference over time.

¹ Inflation is the rise in prices for goods and services over time, meaning your money buys less than it used to.

² These rates apply to taxpayers in England, Wales and Northern Ireland. For Scottish tax bands and rates see HMRC’s ‘Income Tax in Scotland’.

³ Bank of England inflation calculator – figures as of March 2026.

⁴ Dividends are the payments some companies make to shareholders out of their profits.

⁵ Visit the government’s website for more information on tax-free childcare and free childcare for working parents.

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