| It’s not long until the UK budget lands (next Wednesday is the big day). At this point, the fog of speculation is so thick that it’s impossible to tell what’s kite-flying (ideas that won’t make it), what’s expectation management (this tax is going up but not by as much as the scariest forecast out there), and what’s actually going to happen. I’ve already done a fair bit of speculation about what strikes me as the most likely changes that will affect your wallet directly. You can listen to more about that here, or read about it here and here. Beyond this, I don’t think there’s a lot of benefit to going into the specifics of other potential changes at this point. But there are a couple of useful concepts I think you should be aware of, because understanding them now will help you to better prepare, particularly if any stealth taxes rear their ugly heads. The first is the concept of the marginal tax rate. This is the rate applied to the next pound you earn. It’s helpful to understand this because the tax rate you actually pay, and the headline rate you might default to thinking about, are very different. When your average payrolled (pay-as-you-earn) staff member thinks of his or her tax rate, it’s probably the income tax rate that comes to mind. That’s 20%, 40%, or 45%, depending. But on top of this, you have employee National Insurance Contributions (NICs), at 8% and 2%. On top of that, if you went to university and took out student loans, you’ve got what can fairly (if debatably) be described as a graduate tax, in the form of a 9% repayment. And let’s not even get started on employer NICS, which is certainly a cost on employment (at 13.8%). On top of that, once you start earning £100,000 a year, your personal allowance gets taken away, which means the marginal income tax rate spikes to 60%. There are also some toxic interactions with the benefits system (mainly around withdrawal of childcare-related benefits) that mean even more ludicrous marginal tax rates. The figures in this piece are a bit out of date, but it still describes how marginal tax rates work and why they’re almost certainly higher than you realise. Watch Out for Fiscal Drag The second key concept is fiscal drag. This is all about tax thresholds either being frozen, or rising more slowly than inflation. In an economy in which policymakers explicitly aim to have a little bit of inflation in the system (central banks are usually told to target around 2%), fiscal drag is an underhanded way to boost the tax take. Say annual inflation is 2.5%. Let’s say you also get an annual pay rise of 2.5%. You may or may not be happy with that, but at least your wages are keeping up with your standard of living. You can still afford to buy the same stuff as you did last year. But there’s a catch. If income tax thresholds don’t change, then that 2.5% pay rise may well be enough to shift you from being a lower-rate income taxpayer to being a higher-rate taxpayer. As a result, you’ll be paying a higher rate of tax on a pay packet that hasn’t increased in “real” (after inflation) terms. In other words, your standard of living will actually go down, after tax. We wrote about fiscal drag before Jeremy Hunt’s budget way back in, oooh, March 2023. By that point, tax thresholds had already been frozen from the 2022/23 tax year, under Rishi Sunak’s time as chancellor, with the intention of keeping them there until at least April 2026. This freeze was then extended to April 2028 after Hunt took over from Kwasi Kwarteng’s brief stint in the hot seat. There are now rumblings that Reeves will extend the freeze still further, which from a political point of view, seems quite likely, given that it’s a stealth tax and it’s not one that will affect anyone immediately. Depending on whether you have the option and can afford to do salary sacrifice, you can avoid the worst aspects of both marginal tax rates and fiscal drag by basically taking any pay rise in the form of added pension contributions. That way, you can avoid (or at least put off) entering the most egregious marginal tax rate zones. But of course, this requires that you have sufficient slack in your household budget to forgo today’s pay rise (and also that salary sacrifice is still available in this form after the budget, which is not guaranteed). The best thing the chancellor could do within her limited fiscal space is to try to at least make sure that the worst mal-incentives (such as big jumps in the marginal tax rate) are done away with. The problem is that while the complexity might be damaging for the economy, it’s politically convenient. Hence my attempts to make it clear what’s going on — the harder it is for politicians to sneak stealth taxes past us, the more likely they are to wake up and realise that being seen to be transparent and fair might just be a better strategy. Send any feedback, opinions or questions to jstepek2@bloomberg.net and I’ll print the best. If you were forwarded this email by a friend or colleague, subscribe here to get your own copy. - How do you save your stock market from private equity predation? It’s a question that should be on Chancellor Rachel Reeves’s mind, says Merryn Somerset Webb.
- Emerging markets have endured a painful period of underperformance over the last two decades — it’s easy to forget that from 2001 to 2007 the MSCI EM index massively outperformed the S&P 500. How can you ensure you are placed to benefit when their time comes round again? Nir Kaissar shares his thoughts for Bloomberg Opinion.
 How do you put a price on leaving nature to get on with things? Photographer: Ivan Valencia/Bloomberg Looking at wider markets — the FTSE 100 is down 0.2% at around 8,340. The FTSE 250 is down 0.6% at 21,020. Gold is up 0.5% at $2,730 an ounce, and oil (as measured by Brent crude) is up about 1.9% to $74.50 a barrel. Bitcoin is down 0.5% at $68,380 per coin, while Ethereum is flat at $2,710. The pound is down 0.2% against the US dollar at $1.302, and is flat against the euro at €1.20. Follow UK Markets Today for up-to-the-minute news and analysis that move markets. | 
