£1,905 extra stealth tax for high earners by 2028

New calculations from interactive investor show the impact of fiscal drag.

New calculations from interactive investor, the UK’s second-largest investment platform for private investors, show the huge impact of fiscal drag, increasing tax bills by up to £1,905 by 2028.

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Fiscal drag works by freezing tax thresholds so that more and more of our income is taxed at a higher rate as our wages rise with inflation, but tax thresholds remain the same.

A low earner on £15,000 could see their tax bill increase by 106% by 2028, more than doubling despite their pay only rising 21%. They could pay £861 more to the taxman in 2028, due to the basic rate tax threshold being frozen at £12,570, while their wages could increase with inflation.

Meanwhile, a high earner on £50,000 could see their tax bill increase by 35% by 2028, while their wages rise only by 21%. They could be paying £1,905 more to the taxman due to fiscal drag.

Assumptions: wages rise in line with OBR forecast inflation to end of 23/24 and then in by 2%, tax thresholds frozen until 2028, extra tax due to fiscal drag compares figures if tax thresholds rose by inflation.

Alice Guy, Head of Pensions and Savings, interactive investor, says: “By 2028 we could all be paying champagne taxes on a lemonade budget as frozen tax thresholds mean our income is eroded by an ever-increasing tax burden. 

“In times of high inflation, fiscal drag is the ultimate stealth tax, allowing the taxman to take an ever-bigger slice of the pie as our wages rise with inflation. It often flies under the radar as our taxes are calculated by our employer. Few of us remember to check our tax thresholds, and we would be much more likely to notice a rise in income tax rates than a freezing of tax thresholds.

“High earners on £50,000 could be paying £1,905 more tax due to fiscal drag by 2028: their tax bill could be £1,905 higher than if tax thresholds rose with inflation until 2028. Likewise low earners on £15,000 could be paying £861 more tax by 2028 due to fiscal drag, an extra bill they can ill afford on a low income.

“We often think about fiscal drag affecting high earners as frozen thresholds mean more are pushing into the higher-rate tax band. But fiscal drag actually affects low earners more as they pay no tax on a large part of their income meaning that the level of tax thresholds has a huge impact on their tax bill.

“Another victim of fiscal drag is families who receive child benefit. The high-income child benefit charge on income over £50,000 has been frozen since the policy was introduced in 2013. That threshold would now be around £65,000 if it had risen with inflation.

“Raising the basic tax threshold was a key policy of the coalition government. The basic tax threshold was gradually raised from £6,475 in 2010-11 to £10,000 in 2014-15 and £12,500 in 2019-20, where it is due to remain for nine years until 2028, with only a marginal £70 increase in 2021-22.

“If you can afford it then the best way to avoid paying more tax is by paying more into your pension. Pension saving is tax-free in the UK, and the government will top up your pension payments, so it only costs £80 to pay in £100 if you’re a basic-rate taxpayer and £60 to pay in £100 if you’re a higher-rate taxpayer.”