British families saw their incomes drop in real terms last year when household sizes are taken into account, official data has shown, with high inflation and tax demands squeezing people’s finances.
The Office for National Statistics has revealed that equivalised original income for UK households dropped by £1,400 in real terms because salaries did not keep up with inflation.
The measure for household income makes a comparison across different types of households according to the number of people who live there and ages of household members.
It assumes that two-person households will not need double the amount of money a single-person household needs to sustain the same living standards.
Figures published by the ONS will be crucial for the Labour government as it has promised to put more “money in working people’s pockets to spend”.
Share of net contributors to state falls
New measures showed that both the poorest and richest fifth of households across the UK saw decreases in equivalised income. The poorest fifth saw a 7.7 per cent decrease and the richest saw a 3.4 per cent decrease, widening the inequality gap.
Inflation only briefly hit the Bank of England’s two per cent target before last year’s election before surging above three per cent in later months, while the tax burden has continued to edge up over time.
Analysis also showed that fiscal drag, which is where households suffer from a higher tax burden as income tax bands do not move in line with inflation, has hit poorer households more than wealthier families.
The median post-tax income for UK households dropped slightly in 2024 while the final income, which takes benefits into account, remained stable.
Data also showed that nearly half of Brits (46.7 per cent) received more in benefits than they paid in tax.
The number of non-retired households becoming net recipients of the state rose slightly in 2024 to 45.8 per cent due to a further offering in childcare and education benefits.
Labour’s inflation focus
Figures lifting the lid on inequality in the UK and household income are likely to be closely analysed by Rachel Reeves and Treasury officials ahead of the Budget.
The ONS said tax rates and benefits have been key to redistribution over the last few years.
The Chancellor is widely expected to raise around £30bn in taxes and may frame policy communications around redistribution of income and “fairness”.
She is also expected to focus more heavily on curbing inflation to relieve the pressures of the cost of living on Brits.
But the future of the UK economy will largely hinge on whether Reeves’ policies improve growth prospects, with higher GDP levels essential to sustainably boosting receipts and funding public services.
Bond markets lending more cash to the government will judge the Chancellor more harshly and demand bigger debt servicing cost payments if she follows Manchester Mayor Andy Burnham’s calls to be less “in hock” to gilt traders.
Labour backbencher Callum Anderson criticised Burnham on Thursday morning on X. He said: “To lead a Labour government – and a Labour Treasury – you can’t just dismiss the bond markets.
“Every pound spent on schools, hospitals & infrastructure depends on credibility with those who lend to the UK. Real change requires fiscal discipline, not wishful thinking.”
Several City economists including Panmure Liberum’s Simon French have warned that turning against fiscal rules could see lenders lose trust in the government.
There are signs that the government is already facing pressure to curb spending from gilt traders as demand in the latest auctions of five and 30-year gilts hit its lowest level in at least two years.