What is Fiscal Drag?

Explanation

Fiscal drag, sometimes called bracket creep, occurs when tax thresholds are frozen or rise more slowly than inflation and wage growth. As people receive pay rises that keep pace with inflation, more of their income crosses into higher tax bands — even though their real purchasing power may not have increased. In the UK, fiscal drag has become a major policy tool since 2021/22, when the government froze the Personal Allowance at £12,570 and the basic rate band at £37,700 until at least 2027/28. With average wages rising 5-6% per year, this freeze steadily pulls more workers into the basic rate and more basic rate taxpayers into the higher rate. The Office for Budget Responsibility estimates that the freeze will bring millions of additional people into the higher rate bracket by 2028. It is sometimes described as a stealth tax because it raises revenue without any headline tax rate increase.