How ‘Fiscal Drag’ Is Bearing Down on UK Taxpayers

When UK Chancellor Jeremy Hunt announced “the biggest package of tax cuts since the 1980s,” critics were quick to point out that, in reality, Britain’s tax burden is marching toward a seven-decade high. This state of affairs is caused in large part by something known as “fiscal drag,” a form of stealth tax that wasn’t in the government’s manifesto. To some, the phenomenon is depleting disposable incomes during a cost-of-living crisis. Others say it secures the tax revenue needed to stop crumbling public services collapsing.

It’s shorthand for not raising income tax bands in line with inflation. If someone’s earnings rise above a pre-defined threshold, the slice of that income above the band incurs a higher tax rate than the income below it. Typically, the thresholds are raised in step with the growth in prices of goods and services. This is a way to maintain living standards, ensuring that neither workers nor the government are any better or worse off relative to inflation. Freezing the thresholds, or raising them by less than inflation, means more income is “dragged” into a higher band, allowing the government to take a greater share of people’s income. It’s viewed as a stealth tax because it’s not an announced tax, yet the policy can raise a lot of money.