A growing number of households are being pulled deeper into the tax system as frozen thresholds continue to bite, with experts warning the impact is quietly compounding across income, savings and inheritance.
Much of the debate around so-called “fiscal drag” has focused on income tax, where thresholds have remained unchanged for an extended period. The personal allowance of £12,570 and the higher rate threshold of £50,270 are set to remain frozen until April 2031, a move expected to push significantly more people into the 40% and 45% tax bands.
Selaine Saxby, a former MP who has since qualified in regulated financial planning, said the effects are increasingly being felt by ordinary taxpayers, including pensioners who are now more likely to fall into higher tax brackets.
The freeze on National Insurance contributions thresholds, combined with rising wages, is also drawing more employees and employers into higher contributions. This is particularly affecting sectors such as hospitality, where rising minimum wages are adding further financial pressure.
Selaine said the policy is a “significant revenue earner” for the Treasury, especially when combined with inflation. She pointed to a compounding effect, where moving into a higher tax band can trigger increases elsewhere.
She explained that higher rate taxpayers face increased charges on savings interest and capital gains tax, which has risen from 18% to 24%, while the allowance is set to fall to £3,000.
The same freeze on thresholds is also affecting inheritance tax. The personal threshold has remained at £325,000 since 2009, with the Office for Budget Responsibility forecasting that 6.3% of estates will be liable by 2028–29, compared with 2.7% in 2009–10.
Separate analysis by wealth manager Quilter suggests up to 35,000 additional families could be pulled into the High Income Child Benefit Charge over the next three years, reducing the value of government support.
According to forecasts, the overall tax burden is expected to rise from 34.5% of GDP in 2024–25 to 38.5% by 2030–31.
Selaine said that while financial advice can help improve tax efficiency, fiscal drag is likely to continue increasing the burden on households unless there is a change in government policy.
