Income tax rates have not risen since 2010, but frozen thresholds are pulling more professional households into higher bills. For London’s executives, founders and investors, fiscal drag is now a live planning issue.
The tax rise without a headline
The UK has not raised income tax rates for more than a decade. Yet in 2026, higher-rate taxpayers are paying far more income tax than expected 15 years ago. The cause is fiscal drag, frozen thresholds meeting rising wages. For London’s higher earners, the squeeze is now meaningful enough to merit financial planning discussion.
Frozen thresholds have changed the conversation
The personal allowance remains £12,570, the higher-rate threshold £50,270 and the additional-rate threshold £125,140, frozen to April 2028. The OBR estimates that threshold freezes will pull almost 4 million additional people into income tax by 2028/29, while millions more move into higher bands.
For UK financial planners working with higher-earning clients, the conversation has visibly shifted. McCarthy Wealth Management, a trading style of Clarity Wealth Management LLP, an FCA-regulated UK firm, has published guidance on tax planning for high earners, covering how legitimate use of allowances, pension contributions and income structuring may help manage exposure.
What fiscal drag means in practice
As earnings rise while thresholds stand still, more income falls into higher bands without any headline rate change. Above £100,000, the personal allowance is reduced by £1 for every £2 of income, creating an effective 60% marginal income tax rate between £100,000 and £125,140.
For some very high earners, the tapered annual allowance can reduce pension planning flexibility once adjusted income exceeds £260,000. The CGT annual exempt amount has fallen from £12,300 in 2022/23 to £3,000, and the dividend allowance is now £500. Frozen inheritance tax thresholds add another layer where asset values have risen.
Why does London feel it first
London has long had the UK’s highest concentration of higher-rate and additional-rate taxpayers, according to HMRC regional data. ONS earnings figures also show London pay running ahead of the UK average, which means fiscal drag reaches many professional households earlier.
The capital’s pay mix adds complexity. Bonuses, dividends, equity awards, business income and significant savings can all alter tax exposure. High property values mean inheritance tax is increasingly relevant to professional families. For internationally mobile earners, the April 2025 non-dom reforms have added another moving part.
What higher earners are reviewing
The response is not a single product or quick fix. Informed higher earners are reviewing categories of planning that may help them understand exposure before decisions are made. These include pension contribution strategy, ISA usage within annual limits, income timing, salary and dividend structure, estate planning, spousal planning, and long-term cashflow modelling.
For business owners and finance directors, coordinated advice could be relevant where financial planning interacts with accountancy, tax and legal considerations.
McCarthy Wealth’s view
Adam McCarthy, Financial Planner at McCarthy Wealth Management, said: “Fiscal drag is one of the quietest but most consistent forces shaping how UK higher earners experience the tax system. The combined effect of frozen thresholds, reduced allowances and tapering rules has made the landscape materially more complex than it was even three years ago.
“What matters most is that planning is considered holistically. Pension contributions, income timing, allowances, investment structure and long-term goals are interconnected. Tax planning should never be viewed in isolation from access, flexibility and long-term financial security, and outcomes always depend on individual circumstances.”
The questions leaders are asking
For London business leaders, the practical questions are increasingly familiar. Has income been reviewed alongside bonus timing and employer pension contributions? Could the tapered annual allowance apply? Are ISA, CGT and dividend allowances understood within the current tax year? Is a salary, dividend or employer contribution structure still appropriate? Has estate planning kept pace with asset values? Is advice being coordinated with an accountant, tax adviser or solicitor?
The cost of not noticing
The UK tax system has not formally raised rates for higher earners, but fiscal drag has quietly done much of the work. For London’s higher-earning households, the cumulative effect is now substantial enough to warrant serious, personalised planning conversations.
What has not changed is the fundamental principle: planning works best when considered holistically, with pension contributions, allowances, income structure, investment decisions and long-term goals viewed together. It also needs to reflect individual circumstances, rather than treating tax as a standalone exercise.
The most expensive tax mistake in 2026 is not the one made deliberately. It is the one made by not noticing what fiscal drag has quietly done.
This article is for general information only and does not constitute financial, tax, legal or accounting advice. The value of investments can go down as well as up, and past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances and may change in future. Some tax planning matters may fall outside FCA regulation. McCarthy Wealth Management is a trading style of Clarity Wealth Management LLP, authorised and regulated by the Financial Conduct Authority (FCA Firm Reference Number 575252).
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