Fiscal drag again

The Chancellor has decided to freeze all income tax bands, which will lead people to pay more tax on their earnings.

It\’s an old trick and a very boring one. However, the Torygraph doesn\’t quite explain it properly:

All of the main income tax bands will be frozen for the next year – including the tax-free allowance and the level at which higher-rate tax becomes payable.

This so-called “fiscal drag” means that people pay proportionately more tax on their earnings, after receiving a pay rise. Most pay deals are linked to inflation. Income and other tax allowances typically rise in line with inflation.

If keeping pace with inflation, the tax-free personal allowance should rise from £6,475 to £6,669. However, by freezing the rate at £6,475, the Treasury will raise an additional £1 billion and every taxpayer will pay an extra £40 in tax.

The rate at which higher-rate tax is paid will also be frozen at £43,875. However, it should increase to £44,995. The Treasury will make an extra £450 million as a result – £489 for every higher-rate taxpayer, according to accountants.

Even if you do raise the allowances in line with general inflation (which is what is generally but not always done) you still get fiscal drag.

For wages, over time certainly, rise faster than general inflation. So the income tax charges are always creeping down the income scale. This is how we end up with someone working part time on minimum wage paying income tax where a generation ago you had to be on something like average wages full time before you began to pay income tax.

It\’s the one great con trick which just about every Chancellor since the war has indulged themselves in.

1 thought on “Fiscal drag again”

  1. In Australia this is generally referred to as “bracket creep” – the tax brackets are fixed, not indexed in any way, so wages gradually creep up into the higher bands. Which allows governments to periodically cut tax rates or shift the brackets to a great fanfare…usually just before an election.

    Of course beer and smokes excise is indexed.

Leave a Reply

Your email address will not be published. Required fields are marked *