Tax allowances frozen for 2026-27

It was confirmed as part of the Autumn Budget that the Income Tax thresholds will continue at their current levels for a further three years, extending the freeze until April 2031. This means that most tax allowances are to remain frozen for 2026-27 and beyond.

As a result, the personal allowance will stay at £12,570, effectively creating a 'stealth tax' as inflation and wage growth push more people into higher tax brackets.

The impact of fiscal drag

This phenomenon, known as 'fiscal drag', occurs when tax thresholds fail to keep pace with inflation. As wages increase to match the rising cost of living, employees find themselves crossing into higher tax bands, even though their real purchasing power has not improved. This results in the government collecting significantly more tax revenue without officially raising tax rates.

For example, an individual whose salary increases from £48,000 to £52,000 will find that the portion of their income above £50,270 is now taxed at the higher rate of 40%, rather than the basic rate of 20%. Similarly, those earning above £100,000 will begin to lose their personal allowance, and those whose income exceeds £125,140 will be pushed into the additional rate band of 45%.

Other frozen allowances

It is not just the main Income Tax thresholds that are frozen. Several other key allowances remain unchanged, further increasing the tax burden on individuals and families:

• National Insurance thresholds: The threshold at which employees begin paying National Insurance remains frozen.
• Inheritance Tax (IHT) nil-rate band: The standard IHT nil-rate band remains at £325,000, and the residence nil-rate band at £175,000. These thresholds have been frozen for many years, drawing more estates into the IHT net as property prices rise.
• Capital Gains Tax (CGT) annual exempt amount: Following recent reductions, the CGT tax-free allowance remains at a historically low £3,000.
• Dividend allowance: The tax-free allowance for dividend income remains at just £500.

The importance of tax planning

With so many allowances frozen, proactive tax planning is more important than ever. Taxpayers should ensure they are making full use of available reliefs and exemptions. This might include maximising pension contributions, utilising ISAs, transferring income-producing assets to a spouse with a lower marginal tax rate, or considering salary sacrifice schemes.

By taking action now, individuals can mitigate the impact of the frozen thresholds and ensure their finances remain as tax-efficient as possible in the years ahead.