More than a million extra people are expected to find themselves paying more income tax over the next year as the Government keeps tax-free allowances and key thresholds frozen. It is the “fiscal drag” effect in action: pay packets rise, but the points at which you start paying tax - or move into higher bands - do not, a tax watchdog has warned. That means many workers can end up worse off even though income tax rates themselves have not changed.
Analysis of the squeeze
New analysis by the TaxPayers’ Alliance (TPA) suggests the squeeze will be felt right across the country in 2026-27. It estimates around 500,000 people will begin paying basic-rate income tax for the first time, with a further 410,000 pushed into the 40% higher-rate band and another 70,000 moved into the additional-rate bracket. The group says the change will add up to more than one million people paying more to the taxman.
John O'Connell, chief executive of the TaxPayers' Alliance, said: "A million more Brits are being caught in the taxman's net by stealth. Freezing thresholds lets ministers rake in billions without admitting they have raised taxes, hitting workers, pensioners and families across the country."
"If Andy Burnham really wants to give hard-working taxpayers breathing space, he should end fiscal drag and unfreeze tax thresholds."
Political and economic scrutiny
The figures are likely to add to growing political and economic scrutiny of fiscal drag, which has been repeatedly cited by economists as one of the biggest tax-raising levers in recent years.
HM Treasury spokesperson said: "We are protecting payslips by keeping our promise not to raise Income Tax, National Insurance or VAT."
At present, the income tax personal allowance is frozen at £12,570, while the higher-rate threshold remains at £50,270 and the additional rate applies on income above £125,140. The freeze was introduced in April 2022 by then-Chancellor Rishi Sunak and, while it was originally due to expire in 2026, it has since been extended to April 2031 - turning a short-term move into a nine-year policy that critics describe as a stealth tax.
Regional and demographic impact
The TPA believes the impact is now becoming clearer, with millions paying more despite no change to the headline tax rates. It estimates the average taxpayer will pay £640 more in 2026-27 than in 2024-25, and £1,040 more than in 2023-24.
The pressure is not limited to workers. Pensioners are increasingly being pulled into paying income tax as well, with forecasts suggesting the number of over-65s paying it could rise by 630,000 in a single year, taking the total to 10.2 million.
The study also points to a sharp rise in overall income tax receipts, which are expected to hit £347 billion in 2026-27 - £43 billion more than in 2024-25.
Regionally, the burden is expected to fall heaviest in places where earnings are higher. In London, 25.9% of taxpayers are forecast to pay the higher rate, compared with 14.4% in the North East. In the North West - Andy Burnham’s home region - 16.2% are expected to be higher-rate taxpayers.
Concentration among higher earners
The research suggests the tax take is also increasingly concentrated among higher earners. The top 1% of income taxpayers are forecast to earn 12.8% of all income but pay 26.6% of all income tax. Taken together, higher and additional-rate taxpayers are expected to generate almost 73% of income tax receipts.
