How Does the Threshold Freeze Until 2028 Affect Directors?

Key point: The Personal Allowance and NI thresholds have been frozen since 2021 and will remain so until at least April 2028. This creates "fiscal drag" – as wages rise with inflation, more income falls into taxable bands.

For directors, this has significant implications for optimal salary planning. Here's what you need to know.

Confirmed Government Policy

The threshold freeze was announced in Spring Budget 2021 and extended in subsequent budgets. While future governments could change this policy, it is currently legislated through to April 2028.

What Is the Threshold Freeze?

Normally, tax thresholds rise each year in line with inflation. The freeze means:

Threshold	Frozen At	Since	Until
Personal Allowance	£12,570	April 2021	April 2028
Primary Threshold (NI)	£12,570	July 2022	April 2028
Higher Rate Threshold	£50,270	April 2021	April 2028
Upper Earnings Limit	£50,270	April 2021	April 2028

What Is Fiscal Drag?

Fiscal drag occurs when frozen thresholds fail to keep pace with wage inflation. The effect:

More People Pay Tax

Workers who previously earned below the Personal Allowance are pulled into paying Income Tax as wages rise.

More Pay Higher Rates

Basic rate taxpayers are pushed into the 40% bracket as their wages grow but thresholds stay fixed.

Example: The Real Cost

If the Personal Allowance had risen with CPI inflation since 2021, it would be approximately £14,800 by 2026/27 (based on ~18% cumulative inflation). Instead, it remains at £12,570.

This means an extra £2,230 of income is taxable – costing basic rate taxpayers an additional £446 per year in Income Tax alone.

Impact on Director Salaries

For company directors, the freeze has mixed implications:

✓ Optimal Salary Remains Stable

The £6,500 (LEL) or £12,570 (PT) optimal salary levels remain the same year-on-year, making tax planning more predictable.

✗ Dividends Pushed into Higher Rates

If your company profits grow with inflation, more dividend income may fall into the higher 33.75% rate as the £50,270 threshold stays fixed.

✗ Real Value Erosion

The £12,570 Personal Allowance buys less each year due to inflation. In real terms, you're keeping less of your tax-free income.

What Happens After April 2028?

The current policy is for thresholds to remain frozen until April 2028. After this:

Speculation: Thresholds may begin rising with inflation again, potentially significantly
Speculation: A future government could extend the freeze further
Speculation: There may be a one-off adjustment to "catch up" with inflation
Confirmed: No official policy has been announced for the post-2028 period

Planning Strategies

To mitigate the impact of fiscal drag:

1. Maximise Pension Contributions

Employer pension contributions reduce taxable profits and aren't affected by threshold freezes. The £60,000 annual allowance makes this highly attractive.

2. Time Dividend Extraction

If you're near the higher rate threshold, consider spreading dividend extraction across tax years to stay within the basic rate band.

3. Consider Retention

With Corporation Tax at 19-25%, retaining profits in the company may be more efficient than extracting them and paying higher-rate dividend tax.

See calculation →

Key Thresholds Reference

Threshold	2025/26	2026/27 (Projected)	2027/28 (Projected)
Personal Allowance	£12,570	£12,570	£12,570
Primary Threshold	£12,570	£12,570	£12,570
Higher Rate Threshold	£50,270	£50,270	£50,270
Lower Earnings Limit	£6,500	£6,500	TBC

Sources

Disclaimer: This guide discusses confirmed government policy and includes clearly marked speculation about future changes. Please consult a qualified accountant for advice specific to your circumstances.