Poorest households walloped by inflation and higher taxes in 2022

Poorest households saw 24% drop in post-tax income in real terms during 2022, while tax bills soared by 17%.

Interactive investor comments on ONS data on the effects of taxes and benefits on UK household income: financial year ending 2022.

• interactive investor calculations (based on ONS data) show inflation-adjusted changes to tax and income between 2021 to 2022
• Interactive investor adjusted 2021 ONS figures by inflation of 4% (the average inflation for tax year 2021-22) so they are comparable to 2022 figures
• Post-tax income was £329 lower in real terms in 2022 compared with 2021 for the average household and £728 lower for pensioner households
• Post-tax income was £1,574 lower in real terms in 2022 compared with 2021 for the poorest 10% of households and £1,480 for the poorest pensioner households
• Tax bill jumped £1,168 in real terms for the average household in 2022 compared with 2021 and £1,133 for the average pensioner household, even after adjusting for inflation.

Assumptions and sources: original income and post-tax income used equivalised figures so are not strictly comparable to tax and benefits, which are non-equivalised, 2021 figures adjusted for CPI of 4% (the average for 2021/22 based on OBR data). Figures are based on mean average.

Alice Guy, Head of Pensions and Savings, interactive investor says: “This data reveals the devastating impact of inflation and higher taxes on household budgets during late 2021 and 2022, as wages and the state pension failed to keep up with spiralling inflation, while the tax burden rose to the highest in living memory. Average pensioner households saw a £700 drop in their post-tax income compared with 2021 figures, when adjusted for inflation, while working households had a £300 hit to their post-tax income.

“Worryingly, it is the poorest households who have fared the worse. Average post-tax incomes for the poorest working households dropped around £1,600 in real terms between 2021 to 2022, as wages and benefits struggled to keep up with spiralling inflation. Likewise post-tax incomes for the poorest retired households dropped around £1,500 in real terms between 2021 to 2022, as wages and benefits struggled to keep up with spiralling inflation.

“The rising tax burden for the average household is mainly due to rising income tax, VAT and vehicle duty collected. The average working age households paid an eye-watering £647 more on income tax than 2021 due to frozen tax thresholds, £397 more on fuel duty due to rising petrol costs and £330 more on VAT, all after adjusting for inflation.

“Even retired households paid a lot more tax, making it harder to afford household bills. The average pensioner household saw their income tax bill rise £212 from 2021 to 2022. They also spent an extra £554 on VAT and £298 on fuel duty (2021 figures adjusted for inflation).

“For poorer households, the rising tax burden was mainly due to indirect taxes, with the poorest households paying £487 more VAT, £317 more fuel duty and £274 on tobacco duty than 2021, when adjusted for inflation.

“Likewise, poorer pensioner households spent £699 more on VAT in 2022 compared with 2021 and £242 on more on fuel duty (2021 figures adjusted for inflation).

“There’s often a time lag between the wage or pension rises and actual income received, which can have a devastating impact on household finances in times of high inflation. Workers pay rises are based on old inflation figures and their wages usually stay the same for a least a year after their pay rise. Workers who had a pay rise in April 2021 when inflation stood at 1.5%, would have had to survive on the same income until April 2022, when inflation hit 9% in the UK.

“For pensioners, although inflation began to soar in early 2022, the state pension rose only by 2.5% in March 2021 and then 3.1% in April 2022.

“The April 2022 triple lock was suspended, and this has had a continuing impact on pensioner income. The state pension only rose by 3.1% in April 2022, rather than 8.3% in line with average wage rises. The triple lock suspension is still affecting pension incomes as the increases are cumulative, so a lower state pension figure last year means a lower one this year too.

“Times of high inflation always impact the poorest households the worst, particularly those like pensioners with little ability to boost their income. Poorer households spend more of their income on essentials, which have surged more in price during the past two years. With less tucked away in savings, they also often have no cushion to see them through tough times and can end up relying on expensive credit if they are faced with an unexpected bill.

“Despite record wage and state pension increases in 2023, most people won’t be getting inflationary rises on their wage or private pension income. And even with inflationary wage or pension rises, these often lag many months behind inflationary pressures leaving a gap between spending needs and income.”