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Nicola Kelly investigates why the poorest households are the hardest hit by the current state of the economy.
Turn on the news, go to the pub or pop to the shops and there is only one subject everyone is talking about – the cost of living crisis.
Sky-high energy bills, rocketing food prices, even a cup of coffee from your favourite high street barista has become an occasional luxury rather than a daily ritual to put a pep in your step and set you up for the working day.
In the 1950s, British Prime Minister told the electorate: ‘You’ve never had it so good’, as he urged wage restraint and warned against inflation. Unfortunately for Rishi Sunak, shocking figures from the Office for National Statistics (ONS) reveal most of us today, have never had it so bad.
The UK’s poorest households suffered a 24% drop in post-tax income during 2022 while tax bills soared by 17%.
It’s easy to forget amidst the worry of heating our homes and feeding our families that the ‘cost of living crisis’ actually refers to the fall in ‘real’ disposable incomes (adjusted for inflation and after taxes and benefits) that the UK has experienced since late 2021.
Post-tax income was £329 lower in 2022 for average households and £728 for pensioner households, while it was £1,574 lower for the poorest 10% of households and £1,480 for the poorest pensioners.
Despite extensive government support, household incomes are not keeping up with living costs and they aren’t expected to return to 2021 levels in real terms, until 2027.
MoneyMagpie has taken a look at how this squeeze on our incomes might affect you.
In 2021, the average working income, adjusted for inflation, was £44,995, which, post tax, meant a disposable income of £34,309. In 2022 it went up to £45,936 but in reality meant a decrease to £33,980 in your pocket.
The average retired income in 2021, adjusted for inflation, was £20,568. Once you added in benefits and took away tax, retirees were left with £26,114 in 2021. Yet while 2022 saw incomes increase to £21,409, in reality, retirees suffered a £728 reduction in annual income, thanks to an increased tax burden.
For low income earners on £5,494, adding benefits and subtracting tax deductions, gave them £6,623 in 2021. Meanwhile, in 2022, their income was reduced to £5,329, which, with adjustments as previously indicated, left them with £5,049. A drop of £1,574.
Our poorest pensioners already struggling on £3,804, received, after benefits and tax, £9,302, in 2021. Fast forward to 2022 and this has, after benefits and tax, decreased by £1,480 annually, to £7,822.
‘This data reveals the devastating impact of inflation and higher taxes on household budgets during late-2021 and 2022, as wages and the state pension failed to keep up with spiralling inflation while the tax burden rose to the highest in living memory,’ says Alice Guy, Head of Pensions and Savings at Interactive Investor.
‘Worryingly, it is the poorest households who have fared the worse. Meanwhile, the rising tax burden for the average household is mainly due to rising income tax, an eye watering £647 increase since 2021, £397 more on fuel because of rising petrol costs and £330 more on VAT, all after adjusting for inflation’.
Retired homeowners are frequently called out for having an easier financial time of it compared to many, but the ONS figures would suggest otherwise.
Alice adds: ‘Even retired households paid a lot more tax making it harder to afford household bills. The average pensioner household saw their income tax bill rise £212 from 2021 to 2022. They also spent an extra £554 on VAT and £298 on fuel duty’.
She continues: ‘There is often a time lag between the wage or pension rises and the actual income received which can have a devastating impact on household finances in times of high inflation.
‘Workers pay rises are based on old inflation figures and their wages usually stay the same for at least a year after their pay rise’.
So if you got a pay rise in April 2021 when inflation was 1.5%, you would have had to survive on the same income until April 2022 when UK inflation hit 9%.
For pensioners, the so-called ‘triple lock’ has been a core commitment of every government budget since 2010. It meant that the state pension would rise in line with the highest of three measures each year: a flat 2.5% rise, average earnings growth (measured from May to July each year) or inflation (measured in the year from September every year).
With the after effects of the lockdowns and the furlough scheme, the government suspended the triple lock and replaced it with what is effectively a double lock. This means that for 2022-2023, the UK state pension will rise by 2.5% or the inflation rate.
Although inflation began to soar in 2022, because of this tweak to the triple lock, the state pension only rose by 2.5% in March 2021 and 3.1% in April 2022 rather than 8.3% in line with average wage rises. What’s more, because figures are cumulative, a lower state pension figure last year means a lower one this year too.
‘Times of high inflation always impact the poorest worst, particularly pensioners who have little ability to boost their income. With less tucked away in savings, they also have no cushion to see them through the tough times and can end up relying on expensive credit if they are faced with an unexpected bill,’ says Alice.
However there could be a glimmer of light on the horizon. On July 19, it was announced by the ONS that the UK’s inflation rate dropped to 7.9% in the year to June, which means the rate of price rises has slowed more than expected, although it is still high.
Falling fuel prices and the slowing down of rising food prices, have both contributed to the drop.
Chancellor Jeremy Hunt, responding to the latest figures, said the government is sticking to its plan to halve inflation this year.