What is fiscal drag?

The Oxford dictionary defines it as:

‘The deflationary effects of a progressive taxation system on a country’s economy. As wages rise, a higher proportion of income is paid in tax’

The recent comments made by the Chancellor in the Autumn Statement, froze most Income Tax allowance and rates at current levels until 2028.

This means that wage earners who receive pay increases until April 2028, to try and keep spending power intact, will pay income tax on any increase. In certain circumstances, they may also see their taxable income boosted into the 40%, or 45%, Income Tax bands.

If wage increases continue to lag behind inflation, then wage earners will suffer a double hit to their spending power in coming years.

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