Chancellor of the Exchequer Rachel Reeves has frozen income tax thresholds (Image: Getty)
A think-tank has forecast that working-age households are set to be £500 poorer on average in the upcoming year due to income tax thresholds being frozen. And it’s the poorest households who will feel it the most – Resolution Foundation’s newly released report before the start of the tax year found the bottom 10 per cent will be at the ‘sharp end’.
The report said changes to energy and fuel prices alone could mean they experience a rate of inflation almost a percentage point higher than households in the top income ten per cent by the end of this year – according to new analysis released by the Resolution Foundation
The Resolution Foundation warns of a “triple hit” as the new tax year begins in April, with households grappling with the effects of tax, increased utility bills, and huge increases to council tax. It said families in particular will be about £500 worse off because of the personal tax allowance freeze. In the November budget Chancellor Rachel Reeves extended the tax thresholds freeze to 2031.
For the 2026/27 tax year, the standard UK Personal Allowance remains frozen at £12,570, meaning no income tax is paid on earnings up to this amount. The basic rate (20%) applies up to £50,270, higher rate (40%) up to £125,140, and additional rate (45%) on income above £125,140.
Resolution Foundation said that ‘big, regressive’ increases in Council Tax don’t offset ‘welcome’ increases to benefits with rises in energy bills are likely to be a big problem. It acknowledged that the tax year has started with a fall in Ofgem’s price cap – reducing typical energy bills by £117 a year – but added ‘the good news won’t last for long’.
It said: “While there remains a high degree of uncertainty around the future path of energy bills, even a plausible best-case scenario – in which wholesale gas prices fall immediately to pre-war levels – would still mean around a £130 increase in the energy price cap in July. Alternatively, if the recent highs in gas prices become the norm for the remainder of the assessment period, the price cap could increase by close to £440, to around £2,100.”
Lalitha Try, Economist at the Resolution Foundation said: “The cost of living crisis never ended for millions of households – and now a new price shock is on the way, care of the conflict in the Middle East.
“Once again, it is the poorest families who will feel it most. They spend more of their income on essential costs like energy and food, meaning they experience a materially higher inflation rate than their better-off peers.
“The Government’s real-terms increase in Universal Credit this year is welcome and will go some way to reversing its historic erosion. But with energy bills set to rise sharply ministers should be preparing a social tariff that gives low-income households protection against the next price shock – and the one after that.”
It explained that for energy bills poorer households in the second decile of the income distribution spend almost twice as much of their income on energy (11 per cent) as richer households in the ninth decile (6 per cent), meaning price rises in this area will hit poorer families hardest.
The report estimates that based purely on latest estimates of the energy-price shock a household in the bottom income 10 per cent would face an inflation rate of 3.8 per cent by the end of this year, compared with 2.9 per cent for the top 10 – per cent – a gap of 0.9 percentage points. The gap would be greater still if the widely expected rise in food prices drives up inflation, as again poorer households spend more of their budgets on such essentials.
The analysis notes that these expected price rises will be softened for some lower income households by sorely needed benefit changes. Most notably, the end of the two-child limit will offer immediate relief to poorer families with three or more children, lifting 450,000 children out of poverty by the end of the decade.
It said: “Universal Credit will also see its first ever permanent real-terms increase – a landmark, if belated, step. However, after years of below-inflation rises, the value of unemployment support will still sit 5 per cent below its 2010 level. Over the same period the state pension has grown by 20 per cent.”
The report cautions that with the conflict’s path deeply uncertain it remains possible that energy bills remain elevated well into the winter. If this transpires,it said: “the Government should not rely solely on existing policies that raise benefits and reduce energy bills.
“But the Government has time to act. With only 6 per cent of gas and 21 per cent of electricity consumption taking place between July and September these price increases would not bite fully until autumn. The Government should use this time to develop a social tariff on energy bills, providing targeted, temporary support based on household income should bills remain high come the winter.”
Prime Minister Sir Keir has previously promised to keep a planned rise in fuel duty from September “under review in light of what’s happening in Iran”, and the Government has stepped up efforts to help drivers find the cheapest fuel in their area through a price comparison site.
But opposition parties have called for swifter action and have set out their own plans to lower the price of petrol and home energy bills as households face the prospect of energy bill hikes later this year.
The Conservatives have called for VAT on energy bills to be removed for the next three years, Reform UK has pledged to reduce VAT on fuel, and scrap green levies on energy bills, and the Liberal Democrats have said a 10p cut in fuel duty should be introduced.
