Higher earners in the UK will pay nearly £2,000 in extra tax by 2027 due to the impact of fiscal drag, new data shows.
According to research from Interactive Investor, people earning £50,000 a year will pay an additional £1,967 by 2027 compared to if the tax thresholds had risen in line with inflation.
Middle and lower earners are also impacted, having to pay an extra £889 a year by 2027 compared to if tax brackets were upgraded in line with inflation.
The research, which assumes wages will rise in line with the Bank of England’s forecasts for inflation, demonstrates the impact of fiscal drag on taxpayers.
“Fiscal drag is silent and ruthlessly efficient way of raising the tax burden over time,” Alice Guy, head of pensions and savings at Interactive Investor, said.
“It works by freezing tax thresholds so that we pay tax on more and more of our income as our wages rise with inflation. It’s less obvious than raising tax rates, but potentially has an even bigger impact on taxpayers over time,” she continued.
Some experts have labelled fiscal drag a ‘stealth tax‘ because taxes do not actually have to rise. By 2027-28, the Institute for Fiscal Studies suggested that fiscal drag would raise £52bn a year for the government.
The impact on higher earners is even more pronounced if they have children. Back in 2013, the government decided that people would start losing access to child benefits once they earned more than £50,000 a year. Support disappears entirely at £60,000.
A high earner with two children would lose £2,075 in child benefits by 2027 due to the high-income child benefit charge, according to Interactive Investor.
They would lose all their child benefit by 2027 as their salary rose with inflation, the research showed. Combined with frozen tax thresholds this would mean higher earners pay an extra £4,000 per year.
“The threshold for the high-income child benefit charge has remained frozen at £50,000 since it was first introduced in 2013, drawing more and more families into the charge,” Guy said.