Understanding Fiscal Drag

Fiscal drag, or "stealth taxation," occurs when tax thresholds are frozen in nominal terms while incomes rise with inflation. In the UK, the freezing of the Personal Allowance (£12,570) and the Higher Rate threshold (£50,270) until 2028 is generating unprecedented revenue for the Treasury.

The OBR estimates this policy will create 4 million new taxpayers and drag 3 million basic rate taxpayers into the 40% higher rate band by 2028-29, raising approximately £30 billion annually.