UK Households Face Minimal Disposable Income Growth Amid New Budget Measures

The Institute for Fiscal Studies (IFS) has projected that average disposable income in the UK will grow by only 0.5% annually over the next five years. This modest increase is attributed to recent budgetary measures, including the extension of the freeze on income tax thresholds and the introduction of a cap on salary sacrifice pension contributions.

Chancellor Rachel Reeves announced a £26 billion annual tax increase in the latest budget, aiming to address the national deficit. Key measures include extending the freeze on income tax thresholds until 2031, expected to raise £7.6 billion, and imposing a £2,000 annual cap on salary-sacrificed pension contributions from 2029, projected to generate £4.7 billion.

The IFS highlighted that these policies would result in a significant number of workers being drawn into higher tax brackets, affecting their disposable income. The Resolution Foundation supported this analysis, predicting that the growth in living standards during this parliamentary term would be among the lowest on record.

In response to concerns about the impact on working individuals, Chancellor Reeves stated that the budgetary choices were "fair and necessary" to reduce the cost of living and lift children out of poverty. She emphasized that the wealthiest households would bear the brunt of the tax increases.

Despite these measures, the IFS noted that the UK continues to face challenges such as lackluster economic growth and stagnating living standards. The think tank suggested that further reforms in tax policy, competition, regulation, and education are necessary to drive economic growth and improve household incomes.