Glossary · UK

What is Fiscal Drag?

The effect of freezing tax thresholds so that rising wages pull more people into higher tax bands over time.

Full Definition

Fiscal drag is the gradual increase in the tax burden that happens when tax thresholds are frozen (or rise more slowly than earnings and inflation). As wages grow, more income falls above a fixed Personal Allowance and into higher-rate bands, so the average tax rate creeps up without any headline rate rising — a «stealth» tax increase. The UK's main thresholds, including the £12,570 Personal Allowance and the £50,270 higher-rate threshold, have been frozen since 2021/22 and are due to stay frozen to April 2028. The Office for Budget Responsibility estimates this drags millions of additional taxpayers into higher-rate tax. Fiscal drag also pulls more people into the £100,000 Personal Allowance taper and the HICBC.