The rising cost of living and the covid-19 pandemic have caused household incomes to fall in real terms since 2020. While minimum wage increases and changes to benefits have protected low-income households to some extent, more households are experiencing food insecurity and energy debt than before. Universal Credit rollout and the expansion of free childcare continues.

Real household incomes have been falling for everyone

Household incomes have been flat since the 2008 financial crisis, growing by less than 0.5% per year between 2007/08 and 2022/23.

According to data from the Department for Work and Pensions (DWP), since the covid-19 pandemic household incomes adjusted for inflation have fallen slightly, mostly because of high inflation: they were 1.6% lower in 2022/23 than in 2019/20.

Sources of household income

Household income includes wages, benefits, income from investments and pensions.

Chart 1 shows that changes in state support affect households with lower incomes most. Changes in wages affect households at all levels but have a bigger impact on higher income households.

Source: DWP, Households Below Average Income 2022/23, Table 1.2db

Wages

There was high wage growth at the end of 2023 and beginning of 2024 when workers received pay rises because of high inflation.

Overall however, there has been low growth in wages in the last decade, and real wages fell by around £6 a week between April 2019 and April 2023 because of covid-19 lockdowns and high inflation (see chart 2).

Lower-paid workers, though, have had a real increase in wages due to minimum wage rises (see chart 3). In April 2024, the National Living Wage (NLW) reached two thirds of the median wage. The percentage of workers in low pay is now at a record low according to the Resolution Foundation think tank.

The chart shows median weekly wages for full-time employees, adjusted for inflation between 2008 and 2023. Real wages have been flat over this period, staying at around £700 per week in April 2023 prices. It also shows the value of minimum wage rates, adjusted for inflation (in April 2023 prices) between 2008 and 2023. Minimum wage rates include the National Living Wage and rates for people aged 21/22, 18-20, 16-17 and for apprentices. All minimum wage rates
Sources: ONS, Annual Survey of Hours and Earnings, November 2023 Low Pay Commission; ONS CPI index, series D7BT, May 2024

Benefits

The £20 per week Universal Credit (UC) uplift introduced during the pandemic protected the incomes of some benefit-claiming households.

The UC uplift ended in Autumn 2021, but in 2022/23 and 2023/24 additional cost of living payments provided further assistance.

Despite this support, the Institute for Fiscal Studies (IFS) think tank reports that real benefit income fell for the lowest-income third of the population when inflation was at its highest. It projects this effect will be reversed in 2024/25 if inflation continues to fall.

As shown in chart 4, working households that receive benefits could also have a real-terms increase in their income in 2024/25 because of benefit uprating keeping pace with inflation and changes to the minimum wage.

A chart showing the change in annual income from earnings and benefits for hypothetical households containing couples with two children. One household is workless and the other has one adult in work earning full time minimum wage. Both types of household saw real terms income falls between 2020 and 2022, but have seen small real terms increases since.
Note: Working household earnings income based on a two-adult two-child household with one adult on national minimum wage. Workless household based on a two-adult two-child household. Benefit income relates to Universal Credit (including Covid uplift in 2020/21 and 2021/22), Child Benefit and Cost of Living Payments.
Sources: Library analysis based on DWP, Benefit and pension rates 2024 to 2025 (and earlier years), HMRC, National Insurance contributions, Income Tax rates and Personal Allowances and OBR, Economic and fiscal outlook – detailed forecast tables: economy, CPI index, March 2024

Universal Credit rollout


Universal Credit (UC) is replacing means-tested benefits and tax credits (known as legacy benefits) for working-age people. In February 2024, 5.6 million households in Great Britain were claiming UC. When it is fully rolled out, 7 million households could be claiming UC.


In 2022, the DWP began the final Move to Universal Credit stage, involving the managed migration of remaining legacy benefit claimants. Claimants are sent migration notices telling them they must claim UC within three months to continue to receive support. This includes people with health conditions or disabilities receiving income-related Employment and Support Allowance (ESA).


The DWP had planned to send migration notices to around 1 million households by the end of 2024/25, leaving around 800,000 ESA claimants to be migrated in 2028. But the DWP now plans to notify all ESA claimants by December 2025.


Households moving to UC through managed migration who are entitled to less than their existing legacy benefits may get top-up payments so they don’t lose out in cash terms when they move (known as transitional protection). To get these payments, a person must claim UC by a certain deadline.


Fewer UC claims have been made by those sent migration notices than expected. Almost all households sent a migration notice by March 2024 were only getting tax credits, and of those whose legacy claims were closed, 114,700 (29%) had not claimed UC.


The DWP believes that the overall ‘no-claim’ rate for those on other legacy benefits will be much lower at 4%. It is providing enhanced support to ESA and Income Support claimants approaching their deadline who haven’t claimed UC. The Public Accounts Committee warns that even a small proportion of people not claiming UC could still mean substantial numbers facing hardship.

Low-income households since 2019/20

Low-income households were particularly affected by the rising cost of living. As shown in data from the Office for National Statistics (ONS), inflation was driven by the price of essentials like energy and food, and low-income households spend a bigger proportion on essentials.

Low-income households were also already more likely to be buying the cheapest items, so were less able to switch to cheaper alternatives, and they were less likely to have savings.

This means that some households could no longer afford food and fell behind on bills as the cost of living rose.

Food insecurity is rising

As chart 5 shows, the number of people in ‘food insecure’ households rose to 7.2 million in the year 2022/23, an increase of 2.5 million people.

This chart shows the number of people living in food insecure households between 2019/20 and 2022/23. There were 5.0 million people living in food insecure households in 2019/20, 4.2 million in 2020/21, 4.7 million in 2021/22 and 7.2 million in 2022/23.
Source: DWP, HBAI, Table 9.1ts, March 202

The Library briefing Poverty in the UK: Statistics explains other measures of poverty and how they’ve changed over time.

Households are falling behind on energy bills

The ONS found that in May 2024, 30% of adults who pay energy bills found it difficult to afford them.

Citizens Advice, a debt advice charity, has reported increasing numbers of people asking for help with energy debt since 2020. In February 2024, it offered energy debt advice to 11,600 people, a record number.

The Resolution Foundation think tank notes that low-income households are going into energy debt instead of taking out loans.

One reason is that people are being rejected for credit: in March 2023 the foundation found that around 13% of the lowest-income fifth of families had been rejected in the previous year, compared with 5% of the highest income fifth.

Free childcare expansion


The IFS has suggested that, while the majority of families do not say they are struggling with their childcare costs, they are a “significant burden” for a “significant minority”.


The Spring Budget 2023 announced that government-funded childcare for working families in England would be expanded:


  • Since April 2024, eligible two-year-olds have been able to access 570 hours a year (15 hours a week for 38 weeks of the year).
  • From September 2024, eligible children aged nine months to two years will be able to access 570 hours a year.
  • From September 2025, eligible children aged nine months to three years will be able to access 1,140 hours a year (30 hours a week for 38 weeks of the year).

Eligible three-and-four-year-olds from working families have been able to access 1,140 hours a year since 2017.


The government suggested the extension will save parents “an average of £6,900 per year” once fully rolled out.


While the expansion has been welcomed, local councils have raised concerns there may not be enough childcare places to meet the additional demand.


The government estimated an extra 85,000 childcare places and 40,000 childcare staff will be required by September 2025.


In April 2024, the National Audit Office said the government had met its milestones for the first stage of the expansion, but the later milestones “will be more challenging”.


For more explanation of the final stages of UC rollout, see the Library briefing Managed migration: Completing Universal Credit rollout.

What’s next for household incomes?

The Office for Budget Responsibility, the independent watchdog of UK public finances, predicted in March 2024 that household income per person will not return to its pre-pandemic level until December 2025.

See the Library’s briefing on the Rising cost of living in the UK for more.

Further information


Authors: Brigid Francis-Devine, Rachael Harker, Steven Kennedy and David Foster

    The economy and finance

Other articles in this area.

Research in brief: Quick reads for the 2024 Parliament

See all articles in the series.