Chancellor Rachel Reeves is under increasing pressure to tackle the rising issue of fiscal drag, as tax thresholds remain frozen. This policy, often referred to as a “stealth tax,” has the effect of unintentionally pushing more Britons into higher tax brackets.
Experts, including those from GBNews, have warned that without intervention, this trend will continue, creating an even greater burden on taxpayers. The situation is becoming a central issue ahead of the upcoming Spring Statement.
The Impact of Fiscal Drag On Taxpayers
Fiscal drag occurs when tax thresholds remain frozen while wages continue to rise, effectively pulling more people into higher tax brackets. According to analysts, by 2027, one in four teachers and one in seven adults could be classified as higher earners.
This would mean that more individuals are paying higher tax rates despite no real increase in their income.
Ed Monk, an associate director at Fidelity International, explains that if the £50,270 higher-rate threshold had kept pace with rising wages over the past 25 years, it would now be close to £75,000.
By 2028, this threshold would approach £80,000 if it had risen with wages. Instead, fiscal drag is squeezing many into higher tax brackets over time, which increases the tax burden for these workers.
Experts Warn of the Consequences of Frozen Tax Thresholds
The UK’s tax burden is at its highest level since World War II, and the freeze on tax thresholds has contributed to this increase, further exacerbating the impact of the Stealth Tax.
This phenomenon occurs when individuals are pushed into higher tax brackets without any real increase in their income, effectively raising their tax burden over time.
For example, an individual who earned exactly the £50,270 threshold in 2000 would not have been subject to higher-rate tax.
However, by 2025, their wages, rising with average earnings to £74,986, mean they will now pay tax on 33% of their income despite receiving no real pay rise in purchasing power.
The Office for Budget Responsibility (OBR) forecasts that the number of higher-rate taxpayers will reach 7.2 million by 2027, up from just 2.9 million in 2000. This significant increase highlights the effect of fiscal drag on a large portion of the population.
The Political Response and Possible Extensions
With the Spring Statement fast approaching on March 26, there is growing speculation that Chancellor Reeves may extend the freeze on tax allowances beyond 2028.
Pensions expert Charlene Young and others argue that this would further exacerbate the stealth tax burden on workers, especially as asset prices and wages continue to rise while tax thresholds remain stagnant.
While the government has not made any official announcements, the Office for Budget Responsibility (OBR) forecasts that the number of higher-rate taxpayers could increase significantly by 2027.
With the Chancellor preparing for the Spring Statement, many are waiting to see if Reeves will take action to address fiscal drag and the growing Stealth Tax, or if the freeze will continue, increasing the pressure on taxpayers across the UK.
In the coming weeks, all eyes will be on the government’s stance as it balances the need for fiscal responsibility with the potential impact on taxpayers.
