IT’S now a little over two months since the Chancellor of the Exchequer, the Rt Hon Jeremy Hunt MP, delivered his Autumn Statement…

It was widely expected that Mr Hunt would freeze tax levels on November 17^th – and that was precisely what happened.

And this has directly resulted in many analysts discussing how we will all be paying more in taxes as a result of something termed "fiscal drag".

So, what precisely is fiscal drag and what does it mean from an investor’s perspective?

Fiscal drag is an economic concept that describes the process through which income growth and/or inflation pushes people into higher tax bands.

This boosts tax income for the government while enabling politicians to maintain that they haven't raised taxes.

Take a look at a pretty basic illustration.

In the UK, higher rate tax is due on earnings exceeding £50,270.

Assuming you earn £48,000 per year, a 5% pay increase this year (far below the current rate of inflation) will bring your salary to £50,400, just enough to put you in the higher rate band.

You will earn £52,920 if your salary increases by another 5% the following year.

This pay increase will all be taxed at the higher rate.

Jeremy Hunt had a challenging assignment in the Autumn Statement as he attempted to close a £50bn to £60bn deficit in the public finances, depending on which newspaper you read.

The decision to extend the previous Chancellor's income tax threshold freeze from 2026 to 2027/28 had been widely trailed, with the Institute for Fiscal Studies predicting the move could raise £30bn due to the current high inflation.

But the plain concern of how much more tax they would have to pay will bother them more than these larger, macroeconomic amounts.

The middle class will be most hit, according to one financial advisory business, with individuals making £50,000 or more expected to pay an extra £6,570 in income tax over the course of the decade compared to a system where tax thresholds matched inflation.

Average earners, or those making £33,000 a year, will wind up paying an additional £2,557 in taxes, or an increase of around 10%.

The majority of individuals will find the amounts significant.

They may be used for a family vacation; a down payment on a new car; or even money to help their kids buy their first home.

Because of this, it is known as "fiscal drag."

Because a bigger portion of consumers' income is now spent on taxes, the tax rise results in a decrease in overall consumer expenditure.

Deflationary pressures - often known as an economic drag - are brought on by consumers having less money to spend.

The maximum tax rate for wealthier earnings was also reduced by the chancellor from £150,000 to £125,140, while the inheritance tax threshold was frozen for a further two years.

Considering each of these actions collectively, it is now more important than ever to engage in first-rate, long-term, tax-efficient financial planning.

At Future Life Wealth Management, we’ve always been committed to offering this degree of financial planning.

We are always ready and able to assist - as all of our clients are aware - whether it is with pension and ISA planning, utilising all of your available tax allowances, or making sure that your estate pays the least amount of inheritance tax possible.

Please don’t hesitate to ring the Future Life Wealth Management team on (01246) 435996 or click HERE to send us a message.