Fiscal drag likely to increase tax payments by nearly £900 for workers earning £30,000 by 2027

In the realm of political discussions surrounding tax thresholds, alarming new research conducted by Interactive Investor has unveiled the potential burden of fiscal drag on high earners with children.

According to their findings, these individuals are projected to face an annual cost of £4,000 (£1,967 in extra tax and £2,075 lost child benefit) by the year 2027.

The data collected by Interactive Investor sheds light on the escalating impact of frozen tax thresholds. At present, individuals with a salary of £50,000 in 2022 are anticipated to endure an additional tax of £1,967 annually, assuming that the thresholds remain stagnant until 2027. If, on the other hand, the thresholds had been adjusted in line with inflation, their tax burden would have been far less significant.

Notably, this fiscal strain extends beyond high earners and infiltrates the pockets of middle and low earners as well. The research indicates that individuals with a £30,000 salary in 2022 could potentially face an extra tax of £889 by 2027 if the tax thresholds remain stagnant. Similarly, those earning £20,000 are also expected to pay £889 in additional tax by 2027 under the same conditions.

The study conducted by Interactive Investor brings to light another unfavorable outcome for high earners with children. Apart from the extra tax, they are projected to lose £2,075 in child benefit by 2027 due to the high-income child benefit charge. The implications are further exacerbated as the salary increases with inflation while the tax threshold of £50,000 remains unchanged. Ultimately, this high-income child benefit charge would result in the total loss of all child benefit by 2027.

The calculations employed by Interactive Investor assume that wages will witness an inflation-based rise between March 2023 and March 2027. Experts have determined the amount that would have been payable if the tax thresholds had experienced inflation-based adjustments until the fiscal year 2027-28.

Alice Guy, Head of Pensions and Savings at interactive investor, says: “Fiscal drag is a silent and ruthlessly efficient way of raising the tax burden over time. 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.

“Frozen tax thresholds affect all of us, not just higher earners, because the frozen personal allowance means even lower earners gradually pay tax on more of their income.

“If you’re a parent, then fiscal drag is potentially even more painful, as you could stand to lose child benefit as your wages gradually rise with inflation. 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.

“If you can afford to, one of the best ways to minimise your tax bill is to pay more into your pension. Pension payments receive tax relief, meaning you can claw back any income tax paid on your contributions as the taxman will pay tax relief straight into your pension. This means it only costs £80 to pay £100 into your pension and £60 to pay in £100 for higher-rate taxpayers.

“Some employers also offer salary sacrifice, which means you can pay your salary directly into your pension, with no tax at all being charged. This is a great option, as you’ll save on National Insurance as well as income tax, meaning it will only cost £68 to pay £100 into your pension for basic-rate taxpayers and £58 to pay in £100 for higher-rate taxpayers.”