UK Taxes Are Rising Far More Than Most People Realise
The latest UK Budget was widely described as understated — perhaps even uneventful — by much of the national media. The major tax rates, including income tax, VAT, and National Insurance, remained unchanged on paper. For many commentators, that meant there was little to report. Yet hidden within the figures is a far more dramatic story: despite the appearance of stability, the average taxpayer is about to hand over significantly more money to HMRC.
From April, the typical taxpayer will see their overall tax burden rise by around 7%, even though their headline tax rates have not moved an inch. For some people, the increase will be closer to 8% or 9%, depending on income level. For minimum-wage workers, the rise will be even steeper — approximately 10%. These are not speculative projections. They are the direct mathematical consequences of the Government’s decision to freeze tax thresholds for the foreseeable future.
This rise is neither small nor incidental. It represents one of the largest stealth tax increases in modern British history. And yet it has passed largely unnoticed in mainstream coverage. To grasp its true scale, it is necessary to understand how fiscal drag works — and why its effects grow rapidly over time.
The Mechanics of Fiscal Drag — And Why It’s Much Worse Than Expected
Fiscal drag occurs when tax thresholds remain fixed while wages continue to rise. As salaries increase — whether from promotions, job changes or routine pay awards — individuals gradually cross into higher tax bands. Even if headline tax rates stay the same, the proportion of income lost to taxation increases.
Many people understand fiscal drag in theory, but few appreciate how dramatically it amplifies tax receipts when frozen for long periods. The relationship between rising wages and rising tax payments is not linear: it accelerates quickly. As a result, a modest annual pay increase translates into a disproportionately high increase in tax.
Consider someone earning the current UK median salary of around £39,000. According to the Office for National Statistics, average wage growth is currently running at roughly 4.8% per year. If an individual receives an average pay rise at that rate, their total tax and National Insurance contributions will increase not by 4.8%, but by 7.1%.
This is the hidden reality behind the announcement that income tax thresholds will remain frozen until 2031. Although the statement appeared technical and bland, the practical implication is that taxes will rise by more than 7% per year for millions of people. Almost no public discussion has focused on this figure, yet it represents one of the most significant revenue-raising measures in decades.
If the Government had openly increased taxation by this amount in a single year, the public reaction would have been severe. But freezes on thresholds often attract less scrutiny, even though the financial impact is essentially identical.
The Disproportionate Impact Across Income Levels
Fiscal drag does not affect everyone equally. In fact, its impact can be even more severe for those at the lower end of the income scale.
A full-time worker on the minimum wage will see an annual pay increase of 4.1% this year — roughly in line with the increase in the statutory minimum. However, their tax burden will rise by 8.3%, roughly double the rate at which their wage increases. Despite earning barely enough to cover essential living costs, minimum-wage workers are now among the groups hit hardest by fiscal drag.
Individuals earning higher incomes are also affected. For example, someone making £100,000 per year who receives the average pay increase will end up paying 8.5% more tax. The effect compounds with each salary band, pushing increasing numbers of people into higher-rate brackets.
This pattern helps explain a widespread paradox: wages in nominal terms are rising, yet many households feel poorer than ever. Any increase in take-home pay is absorbed — and often overtaken — by the stealth increase in taxation.
Why the Tax Burden Is Growing Faster Than Inflation or Wage Growth
The fiscal drag mechanism has been running for four consecutive years now, and the behavioural impact on the labour market is profound. The threshold for the higher-rate tax band, currently £50,270, has not moved at all in that time. Meanwhile, wages have increased steadily, shifting more of the population closer to the line every year.
Charts using ONS data show clearly how the UK wage distribution has been creeping steadily to the right while the tax boundary stays frozen. Only a small number of people cross the threshold in the early years, but as wage growth accumulates, the number jumps dramatically. In only a few more years, Britain will be very close to a point where half of all workers fall into the higher-rate tax bracket.
This outcome would be historically unprecedented. When the higher-rate band was introduced, it was intended only for high earners — those making significantly more than the average salary. The notion that half the population might one day pay 40% tax would once have been dismissed as absurd. Yet under the current threshold freeze, that is the direction the UK is marching towards.
To illustrate, if the current median wage of £39,039 grows by 5% per year — a modest assumption given recent figures — it will reach £49,825 by 2031. That date is no coincidence; it is the exact year until which income tax thresholds are now frozen. At that level, half the country would fall into the higher-rate band by design, not accident.
This is not a projection based on unrealistic inflation or unprecedented wage growth. It is basic mathematics using today’s published figures. The freeze has been engineered in such a way that a dramatic expansion of higher-rate taxation is almost inevitable.
Why Inflation Serves the Government — Despite Public Suffering
A striking implication emerges from this maths: the Government has a financial incentive for inflation to remain elevated. High inflation pushes wages up, and rising wages drive more people into higher tax bands.
This creates a multiplier effect. A 5% pay rise does not lead to 5% higher tax revenue — it can result in a 7–10% increase. The closer the median salary moves toward the higher-rate threshold, the more powerful the effect becomes.
Viewed from this perspective, the Government’s seeming inaction on inflation appears less mysterious. When inflation runs at twice the level of other comparable economies, the public suffers, but tax receipts surge. Fiscal drag quietly hauls billions into the Treasury without the political challenge of explicitly raising tax rates.
This is exactly why, despite weak economic growth, the Office for Budget Responsibility forecasts a strong improvement in Government finances by the end of the decade. Their models assume billions in additional revenue that will be extracted through this threshold freeze alone. Reduced spending is not solving the deficit; taxpayers are.
Complementary Policies That Intensify Fiscal Drag
Once the scale of this stealth tax rise is understood, many otherwise puzzling policy decisions in the Budget suddenly make sense. Several measures seem unrelated on the surface, yet each one quietly amplifies the effects of fiscal drag.
1. Pension Salary Sacrifice Restrictions
Approximately eight million workers use salary sacrifice to contribute to their pensions. This method allows individuals to reduce their taxable salary, directing part of their earnings straight into retirement savings without paying income tax or National Insurance on those contributions.
From next year, salary sacrifice for pensions will be capped at £2,000 per year. Anyone wishing to contribute more will need to pay National Insurance first, substantially reducing the incentive to save.
This change is particularly damaging because it will push salaries back up artificially — not through wage growth, but through reduced deductions — nudging individuals closer to higher tax bands. It also discourages people from preparing for retirement at a time when the state pension system is already under severe strain.
Restricting pension contributions is not just unwise; it is fiscally irresponsible. The long-term outcome will be more people reliant on the state in old age, multiplying future Government liabilities.
2. Increases to Dividend Tax
Dividend tax rates have been increased by 2 percentage points both for the basic and higher-rate bands. On the surface, this appears to target perceived loopholes used by business owners to pay lower tax. In practice, it undermines a crucial reward for entrepreneurship.
Small business owners take on substantial personal risk when they launch and maintain a company. Many fund their ventures through loans, personal savings, or credit cards. Most businesses fail, and when they do, the owners receive no compensation. The Government does not refund their losses.
For decades, one of the few advantages of running a business successfully was the ability to draw income through dividends at a lower tax rate. Now, with increased dividend tax and a corporation tax rate of 25% on profits over £50,000, that benefit has essentially evaporated.
The result? More business owners will be forced to take income through salary instead of dividends — pushing them directly into the fiscal drag mechanism and further raising HMRC revenue.
But the wider consequence is far more damaging: fewer people will be willing to start businesses at all. Entrepreneurship becomes less attractive when the payoff is uncertain and the tax bill is higher than what one might pay in standard employment.
Even a small reduction in startup formation — as little as 1–2% — can shave 1–2% off future GDP, not just once, but every year. The compounding loss over 10 or 20 years becomes enormous. In an economy already struggling with stagnation, weak productivity, and an exodus of young talent, this represents a serious threat to long-term prosperity.
3. A Political Climate Hostile to Enterprise
Many recent tax policies appear to stem from a narrative of “levelling fairness” between employees and business owners. Yet treating these fundamentally different forms of work as equivalent betrays a misunderstanding of economic reality.
When the risk-reward balance for entrepreneurs tilts too far toward risk, fewer people will participate. Once that trend begins, it becomes self-reinforcing: fewer startups lead to fewer future scale-ups, fewer high-growth companies, fewer job opportunities, and a shrinking tax base.
The UK is already facing a shortage of innovation. Many talented graduates and skilled young workers are choosing to leave the country, seeking better opportunities in Europe, North America, or Asia. When those individuals relocate, the UK loses not only present taxpayers but also future business founders, future investors, and future job creators.
Against this backdrop, policies that actively discourage business formation are economically self-defeating.
The Impact of Minimum Wage Increases and Wage Compression
Minimum wage increases have been celebrated politically, but their wider economic effects are complex. The latest rise — a 4.1% increase for workers aged 21 and over — continues a multi-year trend of above-inflation adjustments.
For younger workers, the increases are even larger:
- 8.5% rise for 18–20 year olds
- 6% rise for under-18s
The Government appears intent on reducing or eliminating age-based tiers, despite long-standing evidence that younger workers often require more training, supervision, and guidance. Employers frequently note that teenagers and young adults, while capable and enthusiastic, often need more support than older staff.
The consequence of raising the minimum wage sharply and uniformly is that some employers simply cannot afford to hire inexperienced workers. Those who most need early job opportunities — younger people and first-time workers — are increasingly excluded from the labour market.
At the same time, sustained increases in the minimum wage have dramatically compressed pay differentials across the workforce. When salaries for entry-level roles rise much faster than average earnings, the gap between the lowest-paid employees and those in mid-skilled roles narrows sharply.
Under current rates, a full-time minimum-wage job pays approximately £26,400 per year. The median salary, at around £39,000, is now less than 50% higher than the legal minimum. The result is a labour market in which pay progression feels meaningless. Workers have little financial incentive to pursue promotions or develop skills when the additional take-home pay is minimal and quickly eroded by higher taxation.
This creates a double negative effect:
- Businesses hesitate to hire, especially in roles that require significant training.
- Employees hesitate to progress, seeing limited reward for additional effort.
A stagnant labour market is the inevitable outcome, with falling job vacancies and declining mobility — trends already visible in official data.
The Broader Economic Consequences
When fiscal drag, rising taxation, a shrinking incentive for entrepreneurship, and wage compression are viewed together, a clear picture emerges: the UK is on a trajectory toward slower growth, reduced innovation, and heightened financial pressure on working households.
The policy environment has shifted sharply away from supporting future prosperity and toward extracting maximum revenue today. While this may shore up public finances in the short term, it undermines the country’s long-term economic outlook.
Some of the likely consequences include:
- A continued reduction in startup formation, weakening the UK’s competitiveness in technology and high-growth industries.
- More young people emigrating, reducing the future tax base and draining talent from domestic industries.
- A widening gap between nominal wage growth and real take-home pay, fueling dissatisfaction and reducing consumer spending power.
- Greater dependency on state support in the long term, particularly if pension saving is discouraged.
- Declining job creation, as high labour costs make employers more cautious.
None of these outcomes benefit the public. Nor do they support the Government’s stated aim of long-term economic stability.
Yet every component of the current Budget seems to accelerate these trends rather than alleviate them.
Conclusion: A Stealth Tax Rise of Historic Proportions
Although the latest Budget appeared modest at first glance, it quietly set in motion one of the largest tax increases the UK has ever seen — not through higher rates, but through the far more insidious method of fiscal drag.
For millions of workers:
- Tax bills will rise by 7–10% next year alone.
- More than half the workforce is on track to enter the 40% tax bracket by 2031.
- Business owners face reduced incentives to innovate or reinvest.
- Minimum-wage earners face some of the steepest tax increases of all.
- The labour market becomes increasingly stagnant as wage compression intensifies.
If these trends continue unchecked, the UK’s economic vitality will continue to erode, and future generations will inherit an economy with fewer opportunities and heavier tax burdens.
While the Government emphasises stability and fairness, the mathematics tell a different story. Behind the quiet language of threshold freezes and minor adjustments lies an aggressive and escalating extraction of taxpayers’ income. Understanding this is essential — because only with full transparency can meaningful debate take place about the direction in which the UK is heading.