The new middle class tax revolt why frozen tax thresholds and looming raids on pensions and savings are changing how we live and work

Hundreds of thousands of British savers are undergoing a radical shift in how they earn and spend their money, and the driving force is tax. As income tax thresholds remain frozen and new tax changes are anticipated, fiscal drag is affecting more people than ever. Working hours are being cut, promotions turned down, pensions given away and even emigration considered—all to shield family finances from punishing bills.

The phenomenon of fiscal drag, which occurs when tax thresholds stay put as wages rise, means millions are newly caught in higher tax brackets. Six million more people will pay income tax this tax year than in 2021-22. Now, 7.1 million workers fall into the higher-rate band, and the number of additional-rate payers has nearly doubled. The nation is on course to pay £298.6 billion in income tax in 2025-26—a rise of £89 billion in just four years, with thresholds frozen at least until 2028. Meanwhile, tax on savings is expected to climb to £6 billion and dividend tax to £18.6 billion.

Financial behaviour is shifting in response. Many families are finding that earning more is no longer worth the trade-off. Justin King, a financial planner from Dorset, cut his hours to retain eligibility for child benefit, worth around £2,250 annually. Once parental earnings surpass £60,000 a year, child benefit is gradually lost, disappearing entirely at £80,000. Because this limit is based on adjusted net income, making higher pension contributions is a savvy move to remain below the threshold and recoup lost benefits while saving for retirement.

Salary sacrifice is another approach. By exchanging part of a salary for extra pension contributions, employees not only reduce their taxable income but also save on National Insurance. However, this strategy can complicate mortgage applications or impact benefits such as maternity pay.

The £100,000 income mark is a notorious tax quagmire in the UK. Earn more than this in adjusted net income and you start to lose your personal allowance, creating an effective marginal tax rate of 62 per cent. Parents also forfeit tax-free childcare and generous free childcare hours. Marketing professional Emily Farmer adjusted to a four-day work week as she approached this limit, sacrificing career progression to preserve crucial family support. Again, raising pension contributions may help high earners claw back some or all of their personal tax allowance by lowering their adjusted net income.

Concerns over inheritance tax are spurring more families to act. From April 2027, pensions are set to count toward inheritance tax calculations. Defined contribution pensions, which were previously exempt, now face the 40 per cent tax if estates exceed £325,000 or £500,000 when a main residence is passed to direct descendants. As a result, savers like Alistair Dickson in Glasgow are using their annual gift allowance, making larger transfers, or even considering moving abroad, all to reduce their heirs’ potential tax burden. Gifts up to £3,000 a year are excluded from inheritance calculations, as are smaller gifts of up to £250 per person. There is also an option to give away larger sums provided you survive seven years after the gifting.

Changing rules on ISAs are also reshaping savings decisions. Amid fears that the cash ISA allowance could be slashed in the next budget, savers poured a record £14 billion into cash ISAs this April. Many, like Rob Mack in north London, are prioritising cash ISAs for their flexibility and tax benefits, aiming to use the full £20,000 allowance before possible changes. While cash savings are vital for emergencies and short term needs, advisers are encouraging regular reviews of investments as the tax landscape shifts.

The looming threat of higher taxation and complex thresholds is rewriting the financial playbook for UK families. As rules tighten and thresholds freeze, adapting your earning, saving, and giving strategies is becoming as important as the sums themselves.