How Fiscal Drag Increases Your Tax Bill
Fiscal drag occurs when tax thresholds are frozen while wages rise with inflation, pulling more people into higher tax bands without any change in legislation. Since 2021, the UK personal allowance (£12,570) and higher rate threshold (£50,270) have been frozen, and they are set to remain frozen until at least 2028.
The practical impact is significant. If your salary rises from £48,000 to £52,000 due to inflation, you cross from the basic rate (20%) into the higher rate (40%) band, even though your purchasing power has barely changed. HMRC estimates fiscal drag will bring 4 million more people into the higher rate band by 2028.
You can mitigate fiscal drag through salary sacrifice pension contributions, which reduce your taxable income below threshold boundaries. See our calculator to check your current position.
How Fiscal Drag Works in Practice
Fiscal drag occurs when tax thresholds are frozen while wages rise, pulling more people into higher tax brackets without any change in tax rates. The UK government froze the Personal Allowance (£12,570), basic rate ceiling (£50,270), and other thresholds from 2021 to at least 2028. This is effectively a stealth tax increase, costing the average worker hundreds of pounds per year compared to thresholds rising with inflation.
Practical Tips
The impact of fiscal drag is cumulative and significant. Between 2021 and 2025, approximately 4 million additional workers have been pulled into the higher-rate tax band. A worker earning £30,000 in 2021 who received inflation-matching pay rises now earns approximately £35,000 but pays considerably more tax in real terms. The freeze also affects the National Insurance threshold and various benefit thresholds, compounding the impact on take home pay.
Related Topics
Fiscal drag makes pension planning more important than ever — pension contributions through salary sacrifice can reduce your taxable income below key thresholds. The frozen thresholds also mean that the percentage of UK workers paying higher-rate tax is at a historical high. See higher rate tax.
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