Craig Simpson, Tax Partner at Bates Weston explains fiscal drag and the National Insurance (NI) reduction.

On the face of it the 2% reduction in the rate of employees national insurance is a winner. Who doesn’t want to have some extra money in their back pocket. But the headlines have been focusing on the increasing tax burden overall. Well that is perhaps not surprising, as the economy grows so too does income profits and consumption. All of which lead to an increase in tax revenues in a progressive tax system.

But what about the impact of fiscal drag? Fiscal drag is where income tax bands stay the same and as income increases more people are dragged into the higher rates of income tax. Take the higher rate tax threshold as an example. Taxpayers move from 20% income tax to 40% income tax for income above £50,270 per annum.

So for many in the middle classes through rising income and the tax bands staying the same next year they will be dragged into higher rates of taxation automatically. Where this happens the individual tax rate including national insurance moves from 30% to 42% for the excess above £50,270.

The result, the exchequer collects more tax by stealth. In order for this not happen the tax thresholds would need to increase by wage inflation each year.

The devil is always in the detail.

This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.

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