With the 2023 average household income data released earlier today by the ONS, Rachael Griffin, tax and financial planning expert at Quilter, has been looking into the detail which shows just why it’s such a challenging picture out there for millions of households
“The latest figures on household disposable income sheds light on the broader economic landscape, highlighting the compounded challenges facing many UK households. At a time when inflation and cost-of-living pressures are squeezing real incomes, the government’s policy of freezing tax thresholds adds another layer of strain, particularly for middle and upper-middle-income earners.
“The 2.5% drop in median household disposable income in FYE 2023, particularly among the wealthiest households, underscores the widespread financial impact that has been exacerbated by fiscal drag. Despite wage growth driven by post-pandemic recovery, more households are being pushed into higher tax brackets, without a corresponding rise in purchasing power.
“As the richest fifth of the population saw a 4.9% drop in disposable income, it is clear that even those at the top end are feeling the impact. However, with their income still six times that of the poorest, their financial resilience offers some buffer, unlike households on the other end of the spectrum. This may be set to get worse in the near future, with Reeves intonating that those with the broadest shoulders would be targeted at the upcoming budget. The previous government’s support measures did help increase the income of the poorest fifth by 2.3%, but this group remains below pre-pandemic levels, reflecting deeper structural issues.
“The government’s approach to fiscal drag has effectively pushed thousands into paying more tax, disproportionately affecting households hovering around key thresholds like £50,000 and £100,000. This creates not just financial but psychological disincentives, particularly for families, where the loss of child benefit and personal allowances acts as a significant deterrent to career progression or additional earnings. The “cliff edge” at £100,000 for personal allowance tapering makes it worse, leading to a high marginal tax rate between £100,000 and £125,000, significantly cutting into disposable income.
“Overlaying these challenges is the broader fiscal environment, where the new Labour government grapples with filling the £22 billion fiscal black hole. With the Office for Budget Responsibility (OBR) warning that UK debt is on an unsustainable path, Labour faces difficult choices at its upcoming budget. Rachel Reeves has pledged no return to austerity, limiting their options. As a result, the government is left with few alternatives to raising taxes or risk what some describe as a “spiral” of public debt. This will likely result in a complex package of measures that demands careful navigation, especially as Labour must balance the economic realities with its manifesto commitments.
“Ultimately, the combination of frozen tax thresholds and rising inflation paints a challenging picture for millions of UK households. Without changes to the current tax system, there is a growing risk that it will continue to disproportionately burden those who are working hard just to keep pace with rising living costs.”
