What is Fiscal Drag?

This is when more individuals move into higher tax brackets due to rising wages /income.

Example:

If an individual’s salary increases from £50,000 to £55,000, they move from a 20% bracket to a 40% bracket, increasing their overall tax burden.

‍

Why is this more relevant now?

Current Tax brackets and the personal allowance (as shown below) have been frozen for a number of years and will continue to be frozen until 2028.

This results in Fiscal Drag, which generates more revenue for the government and means there’s less in everyone’s pocket.  Considering recent inflationary pressures, employers are pressured to increase wages and compensate for the higher cost of living. However, with a freeze on the allowances many are not seeing the full benefit of this, meaning more individuals end up paying further tax. It’s a vicious cycle which means individuals and employers get hit with the tax burden and costs.

**Reduced by £1 for every £2 earned between £100,000 and £125,140.

As you can see, the higher rate threshold of 45% reduced at the start of this tax year, bringing more individuals into this bracket and creating higher taxes.  Another issue is how it affects those with the full state pension, see below:

‍

State Pension Example:

1. The full state pension for 2025/26 is £11,973 per annum.
2. The personal allowance (the amount you can earn/receive without paying tax) is £12,570.
3. Currently,  there’s no tax on the state pension.

However…….

1. The personal allowance is frozen at £12,570 until April 2028.
2. If the state pension increases at a minimum of 2.5% a year, the minimum under the Triple Lock Measures in place, at the start of 2027/28 the full state pension will be £12,579.13.
3. Thus meaning, for the first time ever, all those receiving the full state pension will be taxed.

The State Pension was designed to help those who saved their entire working life have an element of security against retirement.

‍

In Australia the government applies a means tested element, meaning regardless of contributions, you’re not necessarily entitled to it. I wonder if the government would ever go this far..??

Summary

The above is an unavoidable tax drag which is why it’s so important to ensure any savings and/or existing investments are structured in the most tax efficient way.

Priority Wealth Planning work with many individuals and businesses to ensure their financial position is balanced and structured appropriately to navigate and reduce tax where possible, often working with accountants and tax advisers to assist with more complex arrangements.

Please don’t hesitate to reach out if you wish to know more.  

Disclaimer

·      Tax planning is not regulated by the Financial Conduct Authority

·      This is based on current legislation as of March 2025

‍