Have you heard of fiscal drag?
A growing number of people are affected by changes to personal tax allowances and higher interest rates.
A phenomenon known as fiscal drag sees taxpayers pushed into higher tax brackets due to wage increases as they keep pace with inflation.
With the UK Government freezing most tax bands until 2028 and reducing the threshold on the additional marginal rate, fiscal drag can significantly impact people’s finances across different income levels.
Rising inflation
Due to rising inflation and to some degree economic growth, wages have risen from £406 a week to £533 on a median basis over the last ten years, according to Money Week.
It also reported that pay in the private sector, excluding bonuses, rose 6.5 per cent from November 2022 to January 2023.
While these rises may be good news, in reality, they are being eroded by spiralling inflation and the need to pay income tax at higher rates as people enter different tax bands.
Increased tax bills
According to Money Week, those earning £15,000, £20,000, and £30,000 will see their income rise by 21%, but their tax bills will increase by 106%, 50%, and 32%, respectively.
High earners paid over £50,000 are expected to see a 21% increase in wages and a 35% increase in their tax bill – adding £1,905 to their tax bill.
To avoid fiscal drag, people must carefully manage their income to take advantage of tax reliefs, allowances and tax-efficient investments.
