Fiscal drag, or as we like to call it, 'bracket creep', has a significant but silent effect on your finances.
What Is Fiscal drag?
Fiscal drag, occurs when individuals' income taxes increase due to inflation and rising incomes, causing them to move into higher tax brackets or lose out on tax credits and deductions. In essence, you end up paying more in taxes without experiencing a real increase in your standard of living.
Why Is fiscal drag relevant right now?
Tax Thresholds and Allowances: The UK government sets income tax thresholds and allowances annually. If these thresholds are not adjusted to keep pace with inflation and rising incomes, more people will find themselves in higher tax brackets. As a result, you may pay a larger share of your income in taxes.
Frozen Allowances: The Governments has chosen to freeze tax allowances and thresholds 2 budgets in a row. This will keep the allowances frozen till 2028!
Inflationary Pressures: Inflation rates can erode the real value of your income and savings. When tax thresholds don't rise in tandem with inflation, you may experience a decrease in your disposable income.
Impact on Different Income Groups: Fiscal drag can disproportionately affect low and middle-income earners. As they are pushed into higher tax brackets or lose out on tax benefits, they may face a more substantial tax burden, affecting their financial well-being.
To mitigate fiscal drag, consider the following strategies:
Adjust Your Financial Plan: Be prepared for potential changes in your tax liability, and make adjustments to your financial plan accordingly.
Utilize Tax-Efficient Strategies: Explore tax-efficient savings and investment options to optimize your finances.
Engage with a Financial Advisor: Seek advice from a financial advisor or tax professional to understand how fiscal drag might affect your specific financial situation.
At Kala Atkinson we use a mixture of tax structuring and advice from qualified financial advisors to help mitigate risks such as fiscal drag. Get in touch today to find out how we can help!