Fuel and travel costs are pushing prices up again
Thursday 5 November 2026
Inflation has risen to 3.1%, meaning everyday spending is getting more expensive just as household budgets are already under pressure.
Fiscal drag
When rising incomes lead to more tax because tax-free amounts or tax thresholds have not kept up.
Key term
What it means
A tax threshold is the point where tax starts or a higher rate begins. If that point stays fixed while pay rises, more of someone's pay can become taxable or fall into a higher-rate part of the tax system. They may pay more tax even though the stated tax rates have not changed. Pay can rise simply because prices have risen; in that case someone might pay more tax without feeling better off. This effect is called fiscal drag.
Example
Imagine a made-up system where income above £20,000 is taxed at 20%, with no other taxes or allowances. Someone's pay rises from £20,000 to £21,000 while the threshold stays at £20,000. They now pay £200 tax on the extra £1,000. Their new pay might only be keeping pace with rising prices.
Why it matters
A government can collect more tax as incomes rise without announcing a higher tax rate. Checking tax thresholds as well as rates makes that visible.
Also known as
bracket creep
Related terms
-
Effective tax rate
The total tax someone pays, shown as a percentage of the income or other amount being measured.
Read more -
Inflation
A general rise in prices over time.
Read more -
Marginal tax rate
The tax rate that applies to the next pound of income you earn.
Read more -
Personal allowance
The amount of income most people can receive in a tax year before paying Income Tax on it.
Read more
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