This month’s Autumn Statement has led to an onslaught of headlines featuring the phrase ‘fiscal drag’.<\/p>\n
Sometimes referred to as a ‘stealth tax’ the term doesn’t normally move beyond the Westminster bubble or the financial pages so why is it currently causing so much of a stir?<\/p>\n
To understand why commentators are getting so animated about it, we first need to look at what the term means.<\/p>\n
What is fiscal drag?<\/strong><\/p>\n Fiscal drag is a term economists use to explain what happens when tax thresholds do not increase in line with the rising cost of living.<\/p>\n Typically, each year employees can expect to see their wages increase to some extent to help them keep up with the cost of living. This is not a pay rise, rather it is an attempt to ensure employees’ wages are keeping up with inflation.<\/p>\n However, if tax thresholds are not also increased you end up with a situation where more of the lowest earners begin to pay tax for the first time and other workers move into higher tax bands.<\/p>\n For example, currently the nil rate income tax personal allowance stands at £12,570. If this were to grow in line with wages, it should increase to £13,400 next April. If it were to grow in line with inflation it would increase to £13,965.<\/p>\n Without an increase to the tax threshold, someone currently earning £12,570 will be liable to pay tax for the first time if they receive a pay rise in line with inflation in 2023.<\/p>\n This means that although the individual has received a wage increase in line with inflation, after tax they will see a below-inflation rise.<\/p>\n Put simply, fiscal drag is when people pay tax for the first time – when they pay more tax – or when people are dragged into higher tax brackets – not because they are wealthier but because they are attempting to counter effects of inflation.<\/p>\n What happened in the Autumn Statement?<\/strong><\/p>\n In the Autumn Statement, the Chancellor of the Exchequer, Jeremy Hunt, revealed that the nil income tax personal allowance, which stands at £12,570, would be frozen until 2028.<\/p>\n The Basic Rate income tax band, which goes from £12,571 to £50,270 and at which individuals are charged 20 per cent, will also be frozen until 2028.<\/p>\n In addition, the Chancellor announced that the threshold for when the highest earners start paying the top rate of tax – 45 per cent – will fall from £150,000 to £125,140 from April 2023.<\/p>\n These announcements apply to England, Wales and Northern Ireland. Scotland sets its own bands and rates.<\/p>\n What will the impact be?<\/strong><\/p>\n The Government’s economic plans are independently assessed by The Office of Budget Responsibility.<\/p>\n It estimates that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers and will mean 2.6 million more people pay higher rate tax.<\/p>\n","protected":false},"excerpt":{"rendered":" This month’s Autumn Statement has led to an onslaught of headlines featuring the phrase ‘fiscal drag’. Sometimes referred to as a ‘stealth tax’ the term doesn’t normally move beyond the Westminster bubble or the financial pages so why is it currently causing so much of a stir? To understand why commentators are getting so animated […]<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1079","post","type-post","status-publish","format-standard","hentry","category-uncategorised"],"_links":{"self":[{"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/posts\/1079","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/comments?post=1079"}],"version-history":[{"count":0,"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/posts\/1079\/revisions"}],"wp:attachment":[{"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/media?parent=1079"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/categories?post=1079"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/duffyregan.co.uk\/index.php\/wp-json\/wp\/v2\/tags?post=1079"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}