Are Tax Brackets Dragging You Down?

Ok, I apologise for the Valentine’s Day references above, that’s it I promise! It’s not really my thing, ask my husband, I bought him a bag of Fishermans Friends at the shop this morning as a ‘present’ 😍 🤣 

Dragging the mood back down ( 🫠 ), this week I’m looking at Fiscal drag, often referred to as "stealth taxes," which has been impacting all of us since the Conservatives froze most tax rates in 2019. As wages have increased, albeit not in line with the latest round of inflation or house prices, more people will creep across thresholds that were set years ago. In fact, the disconnect between thresholds and wages over the last 40 years means that the % of adults paying higher rate tax has increased from 3.5% in 1992 to 11% in 2023.

This strategy brings in additional tax to the government in a passive move. They do not need to actively increase income tax rates or reduce thresholds, they simply allow the passage of time to provide increased wages and drag more money into paying tax. This is becoming a more talked about issue as the State Pension is set to rise to £11,973 in April, pulling more people into paying tax.

As the government seeks to fill the ‘Black Hole’, it’s unlikely that the tax thresholds will increase to give some breathing space against rising incomes. However, there is a group of people petitioning for an increase and it’s gaining momentum. (https://petition.parliament.uk/petitions/702844)

⚔️ You do have one weapon in your personal arsenal against income tax, and that is pension contributions. Thanks to the income tax relief on these, there are ways to break some of your earnings free from the fiscal drag of frozen rates and build for your future. Want to understand how this works? Get in touch 🙂 

Key Articles I Have Read This Week:

• State Pensions benefit from the ‘Triple Lock’. Fidelity have looked at how this could increase the State Pension in future: Read it here

• Bloomberg ask the question “Is Being Single Bad For The Economy?” An interesting short read: Read it here

Investment Markets This Week:

Best Cash Savings Rates This Week

 🎯 The Impact of Fiscal Drag 🎯 

The table below shows the short term impact of fiscal drag. In less than 5 years, millions more people are paying tax: