New data from the Office for National Statistics (ONS) shows that taxes and benefits are continuing to reduce the gap between the households with the highest and lowest incomes.
At the end of 2023-24, before any taxes or benefits, the income of the top 20% of households was 12.2 times larger than the income of the bottom 20%. This gap has now narrowed to 3.3 times larger.
Commenting on the data, Matt Swannell (Chief Economic Advisor to the EY ITEM Club) noted that the government has a tricky balancing act in promoting taxpayers to continue spending rather than saving.
In the short term, households’ spending power will be tested as pay growth slows and inflation picks up slightly more, he said.
“On top of that, the UK’s tricky fiscal position means more tax rises seem almost inevitable at the upcoming Autumn Budget, with households already feeling the effects of income tax brackets that are not rising with inflation.
“Meanwhile, some homeowners still face the effects of past interest rate rises as they refinance fixed-rate mortgages onto higher rates.”
Despite what might look like a gloomy backdrop, there is an opportunity for consumers to help keep the economy on track, said Swannell.
“Households across the board are in a fairly healthy financial position; however, many are still saving money at above what would be considered typical historic levels.
“If consumers can be given the confidence and security to turn some of that saving into spending, this could help to stimulate growth and keep the economy on the front foot into 2026.”
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