Taxpayers could be hit with an extra "stealth tax" worth more than £3,600 if Chancellor Rachel Reeves extends the freeze on tax thresholds until 2030, according to new calculations.
The current freeze on the personal allowance at £12,570 is set to end in April 2028, but rumours suggest it may be extended by another two years.
This "fiscal drag" effect is considered a stealth tax, as many don't realise they're paying more due to inflation. New calculations by interactive investor reveal the average earner on £35,000 could face a £416 higher tax bill if fiscal drag continues until 2030.
Those earning £50,000 would pay an additional £1,248 in tax. The impact is even more severe for higher earners, with those on £100,000 facing an extra £3,612 in tax due to frozen thresholds.
Britons face losing thousands of pounds due to fiscal drag unless the Chancellor takes action
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The calculations assume a 5.8 per cent increase in wages for the 2025/26 tax year, based on the latest ONS data. Wage growth is then projected to continue in line with the Office for Budget Responsibility's (OBR) annual inflation forecast until 2030.
Over the additional two-year period alone, someone earning £35,000 would pay an extra £223 in tax. Those on £50,000 or £80,000 would pay £670 more.
Myron Jobson, a senior personal finance analyst at interactive investor, explained: "Fiscal drag is the stealthy tax grab that few see coming.
"As wages rise with inflation but tax thresholds remain frozen, more people find themselves paying higher tax rates - even if their spending power hasn't actually improved."
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Fiscal drag is dragging Britons into higher tax brackets GETTY "It's like being quietly nudged into a higher tax band without ever feeling richer," he adds. Jobson suggests increasing pension contributions as a key strategy to mitigate fiscal drag effects.
"Increasing your pension contributions isn't just good for your retirement - it also lowers your taxable income, helping you stay out of higher tax bands," he shared.
Higher and additional rate taxpayers can also claim extra tax relief on their pension contributions.
Salary sacrifice arrangements offer a "double win" for workers looking to counter fiscal drag, according to Jobson.
"Topping up your pension through salary sacrifice is a double win - it reduces your taxable income, helping you avoid fiscal drag, while also cutting your National Insurance bill," he notes.
This approach involves diverting part of your salary directly into your pension before tax is applied.
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Britons are already contending with an increased tax burden
PAFor high earners, pension contributions can help avoid tax cliff edges, particularly the 60 per cent effective tax rate that applies between £100,000 and £125,140 where the personal allowance is gradually withdrawn.
This strategy can also help parents remain eligible for Free Childcare and Tax-Free Childcare schemes.
Those at risk of losing child benefit due to the High Income Child Benefit Charge can reduce their adjusted net income through pension contributions.
Rachel Reeves will confirm the Labour Government's fiscal agenda and changes to tax policy tomorrow during the Spring Statement at 12.30pm.
