Labour Budget 2024: Fiscal Drag Explained. How it affects you.

Now this is where things get a bit tricky. There's been no changes to the personal tax allowance or tax bands, and that's not necessarily good news for us. And why? Because of something called fiscal drag. F I S C A L Fiscal drag. What does it really mean? Think about it like think of inflation like a conveyor belt that nudges your income higher over time. So your salary might increase to try to catch up with inflation. But this does not necessarily make you any wealthier because inflation eats away at the extra earnings anyway. So you don't necessarily have higher purchasing power or feel any richer just because your salary has increased in cash amount. If the tax bands remain frozen while your income is inching up with inflation, you could be pushed into higher tax brackets even if your purchasing power stays the same. It's like an invisible tax hike. Essentially, you're paying more tax without getting significantly richer.