Financial expert Martin Lewis has issued a stark warning to UK households, clarifying that a central measure in the recent Autumn Budget will act as the 'biggest tax rising measure' for the country. Following Chancellor Rachel Reeves' announcements, Lewis has been deciphering the complex policy changes for the public.
What is Fiscal Drag and How Does it Work?
On his ITV programme, The Martin Lewis Money Show Live, the money saving expert broke down the concept of 'fiscal drag' in simple terms. He explained that the government has extended the freeze on Income Tax and National Insurance thresholds for another three years, now lasting until 2031.
This means the points at which you start paying tax, or move into a higher tax band, will not increase with inflation or rising wages. The key thresholds that are frozen are:
- The Personal Allowance: £12,570 (the amount you can earn before paying tax)
- The Basic Rate threshold: £50,270 (the point at which the 40% higher rate kicks in)
- The £100,000 point where you start to lose your tax-free allowance
- The £125,000 point for the Additional Rate of 45%
Lewis stated plainly, "Frankly, this extension, it would have probably been cheaper for us if these had been moved up, and they put a penny on income tax. That is fiscal drag."
The Stark Consequences for UK Taxpayers
The impact of this prolonged freeze is significant and will be felt by millions. As wages gradually increase over time, but the tax thresholds remain static, people will find themselves paying a larger proportion of their income in tax.
Martin Lewis provided startling figures to illustrate the scale of this change. He revealed that from when the freeze began in 2021 until its new end date in 2031, the policy is predicted to have the following effects:
- 5.2 million people who were previously non-taxpayers will be pulled into the tax system.
- 4.8 million people who currently pay the basic rate of tax will be pushed into the higher rate tax bracket.
This represents a substantial shift in the UK's tax landscape, effectively creating a stealth tax rise that will 'cost everyone' over the coming years.
Why This Matters for Your Finances
The core of the issue, as Lewis explained, is that under normal circumstances, you would expect tax thresholds to rise alongside your earnings and the cost of living. "So you're still paying roughly the same proportion of tax as what you earn increases, and what everything costs increases," he said.
However, with the thresholds now frozen until 2031, workers will not get this natural protection. Even if you receive a pay rise that simply matches inflation, you could end up in a higher tax bracket or paying tax for the first time, meaning your real-terms take-home pay may not improve as much as you expect.
This extended freeze means that for the rest of this decade, understanding fiscal drag will be crucial for any UK taxpayer trying to manage their household budget effectively.
