The government has confirmed that personal income tax thresholds will remain frozen until April 2031. On paper, nothing has “gone up”. In reality, this policy quietly increases tax bills year after year.
This is often referred to as fiscal drag. As salaries and profits rise with inflation, more income is pulled into higher tax bands. You pay more tax not because rates have increased, but because the thresholds have not.
For business owners, property investors and higher earners, this matters more than it first appears.
What Is Actually Frozen?
The key thresholds remaining unchanged until 2031 are:
- Personal Allowance: £12,570
- Basic Rate Band: £37,700
- Higher Rate Threshold: £50,270
- Additional Rate Threshold: £125,140
With wages rising across most sectors, more individuals are:
- Moving from basic rate to higher rate tax
- Entering additional rate tax
- Losing part or all of their Personal Allowance once income exceeds £100,000
That final point is where the real impact often lies.
The £100,000 Trap: Where Effective Tax Rates Soar
Once income exceeds £100,000, the Personal Allowance is withdrawn at a rate of £1 for every £2 of additional income. This creates an effective 60 percent income tax rate between £100,000 and £125,140.
Many directors and consultants are drifting into this band simply due to incremental profit growth, inflation-linked salary increases, or dividend extraction strategies that have not been revisited.
The freeze means that more people will fall into this “tax compression zone” every year until 2031.
Example: How the Threshold Freeze Works in Practice
Assume a taxpayer earns £48,000 in 2026 and receives annual pay increases of 4 percent to keep pace with inflation.
By 2030, their income would be approximately £56,000.
If thresholds had risen in line with inflation, much of that income would remain in the basic rate band. Instead, under the freeze:
- A larger portion falls into the 40 percent band
- Their marginal tax rate increases
- Their overall effective tax rate climbs
No tax rate has changed. Yet their tax bill rises each year.
It Is Not Just Income Tax
The threshold freeze has wider implications:
- More Child Benefit is clawed back via the High-Income Child Benefit Charge
- Tapered annual allowance exposure increases for higher earners
- Dividend income more quickly pushes directors into higher bands
- Savings income may lose tax-free treatment
For property investors operating through companies, dividend extraction planning becomes even more important, particularly as dividend tax rates remain elevated.
Who Is Most Exposed?
We are seeing increased exposure among:
- Owner-managed business directors
- Professional partnerships
- Property investors extracting retained profits
- Dual-income households approaching £100,000 each
- Individuals previously “comfortably basic rate” who are now close to £50,270
The freeze disproportionately affects those whose income rises gradually over time, rather than through a one-off jump.
Why Waiting Is Expensive
The key issue with the threshold freeze is that it compounds.
Each year:
- A slightly larger proportion of income falls into higher bands
- More allowances are tapered
- Planning flexibility reduces
By 2031, many individuals who never expected to be higher rate taxpayers will have been paying higher rate tax for several years.
Practical Planning Considerations
While tax rates are outside your control, timing and structure are not.
Areas worth reviewing include:
- Salary versus dividend balance
- Pension contributions to reduce adjusted net income
- Spousal income allocation where appropriate
- Timing of one-off dividends or bonuses
- Use of employer pension contributions
- Retaining profits within corporate structures where efficient
The earlier planning happens in a tax year, the more options remain available.
The Bigger Picture
The threshold freeze is one of the most significant long-term revenue-raising measures in recent years. It increases tax take without increasing headline rates, which makes it easy to overlook.
But for business owners and investors, ignoring it can mean gradually eroding post-tax income and cashflow without understanding why.
Final Thought
A quote from our Principal, Sunil Aggarwal:
Freezing thresholds is a silent but powerful tax increase. Many taxpayers won’t notice the shift immediately — but year after year, more of their income is quietly pulled into higher tax bands. Proactive planning is no longer optional; it requires Discipline, Review, Strategy!
If your income is rising, or you are approaching the £50,270 or £100,000 thresholds, now is the time to review your position.
Careful income planning, pension strategy and extraction timing can materially reduce exposure under the threshold freeze.
A short conversation today can prevent several years of unnecessary tax leakage.
You can:
- Email: info@drs-tax.com
- Telephone: 020 8059 1891
- Submit an enquiry via our Contact Us page
You can also book a free 15-minute consultation to review your position and next steps.