What is Fiscal Drag?
The effect of frozen tax thresholds pushing more people into higher tax bands as wages rise with inflation.
Key Facts
- ✓ Tax thresholds frozen since 2021/22
- ✓ Personal Allowance frozen at £12,570
- ✓ Basic rate band frozen at £37,700
- ✓ Freeze expected until at least 2027/28
- ✓ Effectively a stealth tax — no rate increase needed
- ✓ Millions of additional higher rate taxpayers expected by 2028
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.
Try the calculator: Use our free calculator to see how fiscal drag affects your finances.
UK Tax Bands Reference →Other Glossary Terms
The system HMRC uses to collect income tax and National Insurance directly from employee wages.
National InsuranceA UK tax on earnings and self-employed profits that funds the state pension, NHS, and benefits.
Personal AllowanceThe amount of income you can earn each year before paying income tax — currently £12,570.
Basic Rate (20%)The 20% income tax rate applied to taxable income between £12,571 and £50,270.
Higher Rate (40%)The 40% income tax rate applied to taxable income between £50,271 and £125,140.
Additional Rate (45%)The 45% income tax rate applied to taxable income above £125,140.
Frequently Asked Questions
What does fiscal drag mean?
The effect of frozen tax thresholds pushing more people into higher tax bands as wages rise with inflation.
Why does fiscal drag matter?
Understanding fiscal drag helps you make informed financial decisions and ensure you pay the correct amount of tax. Getting it wrong could mean overpaying or underpaying HMRC, which may result in penalties or missed savings. Use our calculators to see how fiscal drag applies to your personal situation.
Where can I find more information about fiscal drag?
HMRC publishes official guidance on GOV.UK for all UK tax topics. For a quick overview, our glossary entries are written in plain English and updated each tax year. You can also use our free online calculators to model different scenarios and understand how changes to your income, deductions, or allowances affect your overall tax position.