If you’ve noticed your paycheck feels lighter each month, even after a raise, you’re not alone. Many people in the UK are asking, “Why am I paying more tax in 2025?” The answer is an income tax freeze. This change is affecting almost every working adult.
Basically, the government has frozen the income tax thresholds. The amount you can earn before moving into a higher tax band hasn’t changed, even though inflation and wages have risen. This isn’t a traditional tax hike; no new rates have been announced, but the result is the same: you pay more.
This freeze leads to “fiscal drag.” This means more of your income falls into tax rates meant for higher earnings. As inflation increases salaries and living costs, more people end up in higher tax bands, all without a change in tax rates. It’s like being on a treadmill that speeds up; you’re working harder but not getting ahead financially.
Understanding How Income Tax Works in the UK
Before discussing the freeze, let’s recap how income tax works in the UK. The government sets income levels for tax. You pay tax on your earnings in chunks, starting with the first £12,570, which is tax-free (called your Personal Allowance).
After that, you pay 20% tax (basic rate) on income up to £50,270, 40% (higher rate) up to £125,140, and 45% for anything above that. This system ensures that higher earners pay more tax. However, if these income thresholds stay the same and your salary goes up even a little, you end up paying more in taxes overall. This is the hidden impact of frozen income tax bands.
Many people don’t realise they’ve moved into a higher tax bracket. They see a pay rise on paper but feel poorer. At Clarkwell & Co., we often explain to clients in London that without changes to tax thresholds, even small wage increases lead to higher taxes. It feels like a penalty for making progress.
Frozen Tax Bands: A Stealth Tax in Disguise
The term “stealth tax UK” refers to the freezing of tax thresholds. This policy doesn’t grab attention but quietly pulls more people into paying taxes or pushes them into higher tax brackets without raising tax rates.
This is an example of fiscal drag, a concept that is becoming more common. Fiscal drag occurs when inflation increases wages, but tax thresholds remain the same. The government collects more taxes without creating a new tax, leaving taxpayers to bear the cost.
This burden often falls on workers who are already struggling, like NHS nurses, teachers, junior developers, and skilled tradespeople, who end up paying higher tax rates. Many clients in creative industries and influencers are shocked to learn that they now qualify as higher-rate taxpayers, even though their income seems modest.
If Tax Thresholds Rose with Inflation: The 2025 Scenario
Imagine a fair 2025 where the income tax threshold kept up with inflation. If the UK’s personal allowance had matched real inflation since 2010, it would now be about £15,700 instead of £12,570.
This £3,130 gap means many basic-rate taxpayers pay nearly £600 more in taxes each year than they should in a system adjusted for inflation. This issue hits middle earners hard, not just high earners. Clarkwell & Co. recently helped clients in creative fields and contracting who noticed their tax rates rising each year without changing tax brackets.
To illustrate the problem, higher earners who once stayed below the 40% tax band are now crossing it simply because of inflation-related pay rises. This isn’t progress; it’s a hidden penalty. If tax thresholds had matched inflation, many would still be in the basic rate band, taking home more money.
Why More People Are Paying Higher Tax Rates Than Ever
Higher-rate taxpayers in the UK reached a record level in 2025, with over 6.5 million people paying 40% tax, up from 4.5 million in 2015. What changed? Not much, except that UK tax thresholds haven’t increased.
For professionals earning just over £50,000 in London, this situation is tough. As accountants serving areas like Ruislip and Camden, we’ve seen IT contractors and small business owners caught in this tax trap. With rising mortgage rates, childcare costs, and inflation, even a small tax increase can affect finances.
The freeze has blurred the line between middle and high-income earners. In 2023, someone earning £52,000, once seen as middle-class, now faces a 40% tax rate. This affects wealth building, home ownership, and savings.
The Budget That Froze Your Pay: A Look Back
The UK budget income tax freeze started in 2021, when Chancellor Rishi Sunak announced that tax thresholds would stay the same until at least 2026. At the time, it seemed reasonable, but no one predicted the cost-of-living crisis and rising inflation that followed.
Inflation surged above 10% in 2022, and wages increased too. However, because the tax bands didn’t change, many people ended up paying more tax on their higher earnings. This is the hidden effect of freezing tax thresholds. Now, in 2025, many UK households are feeling the financial strain.
Looking back, this policy seemed like an easy way to raise tax revenue without causing political trouble. But many feel misled because it lacks transparency. At Clarkwell & Co., we believe tax policy should be clear, fair, and predictable, qualities that this freeze does not have.
The Tax Freeze’s Real Impact on Your Take-Home Pay
Let’s look at some numbers. If you earned £30,000 in 2021 and got a 5% pay rise each year, you would make about £36,500 by 2025. But instead of being happy about this increase, you end up paying more in tax because the personal allowance hasn’t changed.
Many people don’t realise how tax brackets affect their pay. You’re not just losing money; you’re losing value. At Clarkwell & Co., a trusted provider of the HMRC Tax Investigation Service in London, we help clients understand bracket creep and how it impacts their finances.
Many workers feel disappointed when their effort doesn’t lead to real increases in income. It’s confusing when they don’t see where the extra tax comes from. By teaching people how tax freezes affect their income, we can help rebuild trust and improve financial planning.
The Truth About Basic Rate vs Higher Rate Taxpayers
At first glance, you might think the UK tax rates haven’t changed. However, the tax freeze has led to millions more people paying higher rates. The higher tax band, once just for the wealthy, now includes middle managers, senior nurses, and skilled tradespeople.
For clients in Camden’s creative sector or influencers running limited companies, this means they are now seen as higher-rate taxpayers, even though many still earn a moderate salary. This creates a mismatch between perception and reality.
This mismatch can cause mental and financial stress. People are labelled as higher earners, but they don’t feel any richer. Their lifestyle remains the same, but their tax burden has increased. At Clarkwell & Co., our accountants help clients in the creative industries and influencers in the UK navigate this confusing situation with smart planning and clear advice.
What You Can Do to Protect Your Income Now
You can’t change government policy quickly, but you can take action. Talk to your accountant about salary planning, pension contributions, and allowances. These steps can help you legally lower your taxable income.
If you need guidance, Clarkwell & Co. is here to assist you. Whether you want help with SEIS and EIS tax relief, VAT returns, or general tax strategies, it’s important to understand changes in UK income tax. Don’t let hidden taxes take away your money.
We also suggest regular tax health checks. Just like a yearly physical for your health, you should review your finances regularly. By checking your tax situation each year, you can adapt to changes, optimise your deductions, and plan for big expenses.
Why Awareness Is Your Financial Power Tool
The UK income tax freeze is a significant change in personal finance over the last ten years. With the tax threshold frozen until 2025 and rising inflation, your income may effectively decrease each year.
Knowledge empowers taxpayers. Stay informed to protect yourself. If you feel confused or need advice, our Professional Accountants in Camden, Ruislip, and London are here to help. Visit our service pages, read our blog, and take charge of your financial future.
Remember, it’s not just about what you earn but what you keep. Let Clarkwell & Co. help you maximise your income.
