A typical family in Britain today is £20,000 poorer than they would have been if incomes had kept pace with the rate of growth seen 20 years ago, such is the scale of the UK’s living standards slowdown.
That is the finding of the Resolution Foundation thinktank – which called the living standards challenge facing Britain today “starker than ever”, as the Consumer Prices Index measure of inflation remains at almost double the Bank of England’s target and fears mount of tax hikes in the November Budget.
Since 2005, typical incomes for working-age families have grown by just 7% – not per annum but over the entire 20 year period, according to the research.
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This is a significant fall from the 35% growth recorded during the decade before (1995 to 2005). Had this level of growth continued, the typical family income today would be £51,000, rather than its actual level of £31,000 on average.
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However not all groups have fared equally, with some doing much better than others.
Since 2005, pensioner incomes have grown by 21% pointing to people having more money in retirement, the Resolution Foundation found, while the incomes of people who own their own homes have risen by 14%. Meanwhile the incomes of working-age families in private rented accommodation have increased by just 4%.
“Overall, the story of the last twenty years has been one of a remarkably broad-based collapse in living standards, which can only be addressed by getting at its root cause – a lack of productivity growth in the British economy,” the Resolution Foundation’s report said.
Ruth Curtice, chief executive of the Resolution Foundation, said the scale of the living standards slowdown across Britain “has cost the typical family an astonishing £20,000 a year”.
“As we look ahead, the task of raising living standards across Britain is bigger than ever – we simply cannot afford any more stagnation,” she added.
Government plans on living standards
Raising living standards in every part of the UK, “so working people have more money in their pocket”, is one of the Labour government’s key policy aims in its Plan for Change agenda.
To do this it has given itself the ambition to deliver the highest sustained growth in the G7. However, after a positive first half of the year, UK economic growth is slowly grinding to a halt once again.
UK GDP failed to grow month-on-month in July following a 0.4% rise in June, and slowed to just 0.2% on a three-monthly basis.
Lindsay James, investment strategist at Quilter, said: “This increase was driven primarily by the services and construction sectors, but production output fell by 1.3%.
“However, growth is slowing in these sectors and is likely the result of actions taken by the Labour government now being realised, with the increase in employer national insurance contributions having a significant impact on business confidence.”
We now face continuing uncertainty in the lead up to the Budget in November given the precarious position the chancellor finds the public finances in. It is estimated that the fiscal hole that needs to be plugged is anywhere between £20 billion and £50 billion.
“While that is a wide range, it means one thing for a government that has shown it will struggle to cut spending – more tax rises,” said James.
Ways to make the most of your income
With incomes stretched, and potentially being stretched more in the Budget, one route to make them go further is to keep on top of your tax bill.
Alice Haine, personal finance expert at Bestinvest, the DIY investment platform and coaching service, outlines ways to get your tax affairs in the best possible shape to keep more of what you earn.
1) Set up a Direct Debit to use your £20,000 tax-free ISA allowance
The £20,000 ISA allowance is a use it or lose it allowance. This tax year savers have until midnight on 5 April 2026 to utilise it. But getting ahead can help prevent you from paying tax on investments held outside a tax wrapper or on cash held in a regular bank or building society that could place you at risk of breaching your personal savings allowance.
Investing a set amount each month takes advantage of pound-cost averaging, so rather than investing a lump sum at a single price point, investors can buy smaller amounts at regular intervals no matter what the price is at the time. This approach helps cushion the effects of market volatility over the short- to medium-term and is particularly sensible during times of global economic and market uncertainty such as we are currently in.
2) Top up your pension to slash your income tax bill
Topping up a pension not only boosts retirement income in the future but also slashes your income tax bill today because any contributions attract tax relief at your marginal rate. Basic rate taxpayers have 20% in tax relief added to their pot with each contribution while those on the higher 40% and 45% tax rates can respectively claim a further 20% and 25% off their tax bill for the year (different tax rates apply in Scotland).
While there is tax to pay when you eventually come to withdraw your pension pot, bar the ability to take out 25% tax-free, topping up your pension can not only dramatically improve your retirement prospects but also improve your current tax position.
3) Initiate a Bed & ISA or Bed & Pension now to reduce your tax liability
The Government tightened its grip on investors with the hike to capital gains tax rates at the Autumn Budget. Add that to the cut to the annual capital gains tax exemption in recent years, halved to just £3,000 by the former Conservative Government, along with the reduction in the annual dividend allowance to just £500 and more ordinary investors may find themselves paying tax on their investments for the first time.
Moving investments, such as shares and funds, held outside a tax wrapper into the safe confines of an ISA or pension, a process known as Bed & ISA or Bed & Pension allows investors to sell shares or funds – ideally, with careful use of their current exemptions – and repurchase them within their chosen tax wrapper so that future returns are tax-free. Just remember to calculate your capital gain carefully before selling, so that you’re aware of any tax liability you will incur if you exceed the £3,000 CGT exemption.
4) Sign up to your employer’s salary sacrifice scheme and drop a tax band
Salary sacrifice can be an effective way to reduce your adjusted net income to avoid some of the nasty cliff edges that can hit taxpayers as their income increases. Increasing numbers of employers now offer these schemes that let staff reduce their salary or bonus payments in lieu of increased pension contributions. This is because by reducing your gross salary, it reduces the amount of income tax a worker must pay and the National Insurance contributions for both the employee and employer.
Employees close to the £50,270 earnings threshold where the higher 40% tax rate kicks in, for example, could dip under it by using salary sacrifice pension contributions. It is worth asking your employer if they offer such a scheme as more companies may be inclined to do so in a bid to lower employment costs following the hike in the National Insurance rate employers pay on employee salaries that came into force in April.
