UK income tax: Understanding how fiscal drag shifts people into higher brackets

Former Conservative finance ministers, from Rishi Sunak to Jeremy Hunt, have held income tax thresholds steady over the last four years. When these thresholds don't rise with inflation, a phenomenon called "fiscal drag" occurs, leading to more individuals being taxed at higher rates without an increase in income.

This policy has proven financially beneficial for the government. The Office for Budget Responsibility predicted in November that maintaining the personal income tax allowance at £12,570 and the higher rate threshold at £50,270, rather than adjusting for inflation, could generate an extra £26 billion.

An accompanying graphic demonstrates how fiscal drag has incrementally nudged more people into paying higher taxes over the past decade. Users can scroll to view historical changes.

Data for this analysis was derived from HM Revenue and Customs (HMRC) via freedom of information requests, summarized from the Survey of Personal Incomes. It is important to note that in this graphic representation, income levels are categorized in increments of £1,000, and totals for the working-age population are approximated to the nearest thousand. The top income group extends from £350,000 upwards without an upper limit. Any income categories with negligible or no data are counted as zero.

Although the analysis considers all taxpayers, including those receiving state pensions, the chart only reflects individuals of working age, due to data constraints from HMRC.

Moreover, the official working age has increased over the last decade, now standing at 66 years for both men and women as of the 2023/2024 tax year. This change, along with overall population growth, has led to an increase in the number of people subject to income tax.