Fiscal Drag Calculator, 2026/27

How this is calculated

Fiscal drag happens when tax thresholds are frozen while wages rise with inflation or pay rises, so a growing share of income is pulled into tax, or into higher tax bands, purely because the thresholds have not moved, not because tax policy has explicitly changed.

The calculator grows your current salary forward at your chosen annual rate for the number of years you select, then calculates income tax on both the current and future salary using the same, unchanged 2026/27 bands, since the personal allowance and thresholds have been frozen rather than uprated for several years running.

Comparing the effective tax rate, the percentage of gross salary taken in income tax, at the start and end of the period shows how much of the increase is genuinely disposable income versus how much is absorbed by tax due to frozen bands.

Why frozen thresholds matter more than headline rates

Governments can raise significant additional tax revenue simply by leaving thresholds unchanged while wages rise with inflation, without ever announcing a rate increase, which is why fiscal drag is sometimes described as a stealth tax.

Someone whose salary rises from just under £50,270 to just over it moves from paying 20% at the margin to paying 40% at the margin overnight, purely because of where their pay lands relative to a frozen threshold, not because their circumstances have changed.

What this means for planning

Because thresholds are frozen, pension contributions, which reduce taxable income, become more valuable over time as a way of managing which band a salary falls into, particularly around the £50,270 and £100,000 points.

Reviewing salary, benefits and pension contributions each year, rather than assuming last year's tax position still applies, becomes increasingly important the longer thresholds remain frozen.

What is fiscal drag?

It is the effect of tax thresholds being frozen rather than rising with inflation or wages, which means more of your income is taxed, or taxed at a higher rate, over time even though tax rates themselves have not changed.

Are the personal allowance and higher rate threshold frozen for 2026/27?

Yes, the personal allowance and basic rate band have been frozen for several years running with no announced increase for 2026/27, continuing the freeze that has been in place since 2021/22.

How does this affect someone near £50,270?

As wages rise but the £50,270 higher rate threshold stays fixed, more people cross into the 40% band each year on income that would previously have stayed within the 20% band, increasing their tax bill more than proportionately.

Can pension contributions help offset fiscal drag?

Yes, since pension contributions reduce taxable income, they can keep income below a frozen threshold for longer, delaying the point at which a higher marginal rate starts to apply as wages rise.