10,000’s of taxi and private hire drivers could be affected by ‘FISCAL DRAG’ costing workers thousands of pounds, if the Prime Minister chooses to freeze personal income tax allowances.
It is reported that Prime Minister Rishi Sunak is considering a further two-year extension to the current freeze on personal income tax allowance. There is also speculation that there will be a further hold on the higher-rate thresholds that were due to end in 2026.
However, as inflation continues to rise and wages try to stay with growth, workers could see their tax bills rapidly rise due to a concept called ‘fiscal drag’.
Fiscal drag is when inflation and earnings growth push taxpayers into higher tax thresholds. Fiscal drag therefore has the ability to bring in more Government tax revenue without increasing tax rates.
How will fiscal drag affect cabbies?
There will be plenty of part-time cabbies pushed into the £12,571 basic rate threshold due to fiscal drag. Rising average earnings will mean a higher percentage of the working population will end up paying both the basic and higher rate of income tax.
For some cabbies the higher tax rate band of 40% for income over £50,270 will also come into play.
If tax allowances are frozen, and based on current levels of inflation, it has been forecasted that a taxi driver earning £30,000 a year would pay an extra £1,919 in tax between now and the end of the 2028-29 tax year.
Fiscal drag can also work in reverse. If there is deflation and falling wages, fewer workers would be in the higher tax bracket. It is worth noting that deflation has not been common since pre-1939, but never say never if recent global events are anything to go by!
Fiscal Drag can be easily managed by listing tax bands in line with earnings or inflation… but it’s rarely done.
The concept also runs over to Stamp Duty payments too. Stamp Duty currently sits at 5% for homes costing more than £250,000. Whilst house price are set to stagnate in the short term, inflation will ultimately drive more UK house prices up over the threshold in the long-term.
The OBR recently calculated that the freezing of the Personal Allowance and Higher Rate Thresholds could move an extra 2.77m people into tax by 2026 and an extra 2m taxpayers into the higher rate of tax by 2026.