What is Fiscal Drag? UK Definition 2026/27
Quick Answer
The effect of frozen tax thresholds pushing more people into higher tax bands.
Definition of Fiscal Drag
Fiscal drag occurs when tax thresholds are frozen while wages rise with inflation, gradually pushing more taxpayers into higher tax bands or reducing their allowances. The UK has frozen the Personal Allowance and basic rate threshold until 2028, meaning more people become higher rate taxpayers each year without actual tax rate increases.
Fiscal Drag — Key Facts for 2026/27
| PA frozen until | April 2028 |
| Basic rate frozen | April 2028 |
| Effect | Silent tax increase |
| Higher rate payers | Increasing annually |
How Fiscal Drag Works — Example
- 12021/22: Earning £50,000 - basic rate taxpayer
- 23% annual pay rise each year
- 32025/26: Earning £56,000 - higher rate taxpayer
- 4Thresholds: Unchanged at £50,270
- 5Extra tax from fiscal drag: ~£2,000/year
How Fiscal Drag Affects Your Tax
Fiscal drag is sometimes called a stealth tax as it raises revenue without explicit rate increases. Over the freeze period, millions more will become higher rate taxpayers, and more will lose their Personal Allowance.
Official HMRC Guidance on Fiscal Drag
For official guidance, refer to HMRC's documentation. Tax rules can change, so always verify current rates and thresholds on gov.uk.
HMRC: Income Tax ratesFrequently Asked Questions about Fiscal Drag
Related Tax Terms
Accuracy Note
This information is for guidance only and is based on 2026/27 tax year rates. Tax rules are complex and your circumstances may differ. For personal advice, consult a qualified accountant or tax adviser.