Living Standards, Poverty And Inequality In The UK - 2023

15th July 2023

A report from the Institute for Fiscal Studies.

1. Average (median) disposable household income before deducting housing costs rose by 0.5% in 2021-22, but remained 1.2% lower than its pre-pandemic level. The relatively muted increase in 2021-22 reflected a 4.8% rebound in nominal incomes being largely offset by a sharp rise in inflation. A fall in housing costs over the pandemic means that average incomes measured after deducting housing costs were 0.2% higher in 2021-22 than in 2019-20.

2. Income growth was stronger among poorer households, with those in the bottom third of the distribution seeing a rise between 2019-20 and 2021-22 of 1.5% before deducting housing costs and 2.7% after deducting housing costs. Large falls in employment income among this group were more than offset by a rise in benefit incomes (in particular the temporary £20 uplift to universal credit) and a fall in housing costs, both of which affected low-income households more than households further up the income distribution.

3. The increase in benefit incomes among low-income households did not simply reflect a fall in employment income. Average benefit receipt in 2021-22 was higher than in 2019-20 at every level of earnings, due to the £20 universal credit uplift that persisted until October 2021 and the increased generosity of universal credit for in-work households from November 2021. The share of households in the bottom third of incomes that received disability benefits rose by 26%, from 12% in 2019–20 to 15% in 2021–22, driven entirely by an increase among working-age households.

4. Individuals aged 50–70 who moved from employment into economic inactivity in 2020–21 were more likely to end up in poverty (in the year of exit) than those who became inactive in previous years. This is despite poverty rates falling among 50- to 70-year-olds who had been inactive for more than a year (that is, it does not reflect an overall fall in living standards among inactive individuals in the age group). Measures of self-reported well-being also declined more for recently inactive individuals in 2020 than for those who had been inactive for longer. For people who became inactive in 2021–22, outcomes were much more similar to those seen among people who became inactive pre-pandemic, suggesting that there is particular cause for concern for the 2020–21 cohort.

5. This decline in living standards and well-being challenges the perception that exits into inactivity over the pandemic were driven by wealthy individuals who could afford to retire in comfort. Instead, many of those who left the workforce in 2020–21 may have been ‘forced' into early retirement, with an associated hit to their living standards and well-being. People who become inactive at older ages often never re-enter the workforce, so it is likely that many in this cohort will experience persistently low living standards. In contrast, those who became inactive in 2021–22, when the labour market disruption and health risk had largely subsided, are more likely to have done so out of choice.

Poverty
1. The overall absolute poverty rate fell in the first year of the pandemic (2020–21) and was little changed in 2021–22, leaving it nearly 1 percentage point (ppt) or 480,000 people lower than its pre-pandemic level. This is largely due to changes in benefits policy, in particular the (temporary) £20 universal credit uplift and (permanent) changes to the universal credit taper rate and work allowances, which allow workers to keep more of the benefit as their earnings rise.

2. The £20 uplift reduced absolute poverty rates by 0.3ppts during the six months it was in place in 2021–22, or by 0.6ppts in annualised terms (379,000 people). The changes to work allowances and the taper rate that succeeded it had a much more muted impact on poverty. Their annualised effect is only 0.2ppts (133,000 people) – a third of the impact of the uplift. Even on a per-pound basis, the £20 uplift had a 40% larger effect on poverty. This is because changes to work allowances and the taper rate mainly benefit somewhat higher-earning households further up the income distribution and do not affect out-of-work households at all.

3. The first instalment of the cost of living payments to households receiving means-tested benefits – £326 paid in July 2022 – substantially boosted spending. Discretionary spending was £33 a week (12%) higher for recipient households on average in the four weeks after the payment than in the four weeks before, and remained somewhat elevated up to 15 weeks after the initial payment. The rise in discretionary spending was driven by an increase in cash withdrawals, spending on groceries, and spending on entertainment (e.g. restaurants, streaming services), which accounted for 17%, 15% and 28% of the total increase in discretionary spending respectively. That recipients responded strongly to the payment suggests that, prior to the payment, many had limited savings or means of borrowing available to them, and wanted to spend more than they were able to. That a substantial fraction of the cost of living payment went on basic goods such as groceries, but also on more discretionary goods such as entertainment, indicates a variety of levels of ‘need' among recipient households.

4. Recipients with lower earnings increased their spending by more immediately after receiving the cost of living payment, which may indicate higher cash constraints in the lead-up to the payment. However, the distribution of extra spending across categories (groceries, entertainment etc.) was similar across recipients with different levels of earnings.

Housing quality and affordability for lower-income households
1. Facing higher housing costs, renters are considerably more likely than owner-occupiers to have low living standards on a variety of measures. Social and private renters have poverty rates of 46% and 34% respectively, compared with 12% for owner-occupiers. And they are also far more likely to be materially deprived or to live in food insecurity.

2. A steadily growing fraction of low-income households are in the private rented sector, while the share in social housing has declined, as has (in more recent years) the share who own their own home. Younger generations of low-income individuals are now especially likely to be renting privately. For low-income adults born in the 1960s or before, private renting rates ranged from 5% to 20% at almost every age. But for those born in the 1970s it has persistently been in the 25–30% region, and for those born in the 1980s around 40–50%, as social renting and owner-occupation have declined. These patterns suggest that private renting will become even more common among low-income families going forward. This matters because those in the private rented sector have higher housing costs than both social renters and those owning with a mortgage, as well as having less security of tenure.

3. As well as the private sector having higher costs for tenants, the quality of homes, at least for low-income families, is worse. Among lower-income families, those in the private rented sector are more likely than social renters or owner-occupiers to be living in a home that is unsafe, in disrepair, difficult to adequately heat or lacking modern facilities. 25% of their homes would therefore fail the Decent Homes Standard required of social housing, compared with 18% of owner-occupied homes and 12% of social rented homes. Private rented homes are also more likely to have poor energy efficiency, be insecure or be damp, while rented homes in both sectors are more likely to be overcrowded and in areas of poor upkeep and appearance.

4. In the wake of the pandemic, the local housing allowance (LHA) rates which cap maximum housing benefit entitlements were increased to the 30th percentile of local rents. At that point, 23% of private rental properties listed on Zoopla were affordable for housing benefit recipients, which we define as having rents that can be completely covered by housing benefit. Since then, LHA rates have been frozen in cash terms and rents for new lets have risen by over a fifth on average. As a result, in 2023Q1 just 5% of private rental properties were affordable for housing benefit recipients. The rapid decline in affordability has been seen across all parts of the country.

5. A declining share of properties being affordable to housing benefit recipients affects the relative quality of those that are affordable. Relative to the nation as a whole, affordable properties in 2023Q1 were 15% more likely to have an energy rating of D or below, and had 19% higher heating and hot water costs. These gaps have increased as the number of affordable properties has declined in the past few years. This shift is especially pertinent given recent increases to energy costs. Affordable properties are also generally more likely to be in low-employment and high-crime areas, though have slightly better access to local services such as post offices, supermarkets and GPs.

1. Introduction
This report explores how material living standards have changed since the beginning of the pandemic, based on household incomes as well as other indicators. We use the latest official data, covering years up to 2021–22, to describe the effect of the pandemic and subsequent response on household incomes in the UK, looking in detail at living standards of those individuals who became inactive during the pandemic. We study the impact of various benefit policies implemented during these years, considering their implications for poverty. And we examine the quality and affordability of the private rental sector, which has become especially important for analysing the living standards of people on lower incomes in recent years.

The analysis in this report is chiefly based on data from the Family Resources Survey (FRS), a survey of around 20,000 households a year, which contains detailed information on different sources of household incomes. We use household income variables derived from the FRS by the UK government's Department for Work and Pensions (DWP). These measures of incomes underlie DWP's annual statistics on the distribution of income, known as ‘Households Below Average Income' (HBAI). The FRS/HBAI data are available for the years from 1994–95 to 2021–22. They are supplemented by HBAI data derived from the Family Expenditure Survey (FES) for the years from 1961 to 1993.

In addition, Chapter 2 draws on data from Understanding Society: the UK Household Longitudinal Study (UKHLS) and the Annual Population Survey (APS) to explore changes in the living standards of recently inactive individuals. Chapter 3 makes use of bank transaction data from ClearScore to study the effects of cost of living payments. Chapter 4 uses data from the English Housing Survey and Zoopla microdata to investigate changes in housing.

Measures of household income are the key outcomes used in this report. We use the measure of income that is used in the HBAI statistics, or construct a measure as similar as possible when using other data sources. Further details regarding the methodology of HBAI can be found in Appendix A, but it is worth noting that when we refer to household income, we specifically mean ‘net equivalised household income'. ‘Net' indicates that we are looking at incomes measured after direct taxes (including council tax) are paid, and after benefits and tax credits are received. ‘Equivalised' means that incomes are rescaled to account for the fact that households of different sizes and compositions have different needs. ‘Household income’ means that we add up the income (from all sources) of each person in the household. We sometimes term this measure of income ‘disposable income’. Although we measure household incomes, we conduct our analysis at the individual level, meaning that we look at poverty, inequality and differences in living standards between individuals, not between households.

All cash figures for incomes are presented in 2021–22 prices and all income growth rates are given after accounting for inflation. We adjust for inflation using measures of inflation based on the Consumer Prices Index, which are the same measures as are used by DWP in the government’s official HBAI statistics.

Throughout this report, many statistics will be presented for the whole of the UK; however, for those series looking at longer-term trends, we present statistics for Great Britain (GB) only, as Northern Ireland has only been included in the HBAI data since 2002–03.

The rest of this report proceeds as follows.

Chapter 2 examines trends in households’ living standards, focusing particularly on the two years since the beginning of the pandemic. This chapter shows how average incomes have changed, and how that has varied for households at different points in the income distribution. We go on to explore the implications of these changes for income inequality. We then look at the role played by different income sources in driving these trends, contrasting with households’ experiences between 2011–12 and 2019–20. Finally, we focus on the living standards of individuals aged 50–70 who became economically inactive during the pandemic, looking at measures of income as well as subjective well-being.

Chapter 3 explores changes in poverty, considering particularly the importance of reforms to the benefit system in driving these. We start by describing changes in absolute and relative poverty for different groups of the population that have occurred since the start of the pandemic. We then use microsimulation to estimate the effects on poverty of two key reforms to the benefit system – the £20 per week uplift to universal credit (UC) and changes to the UC taper rate and work allowances. This is followed by analysis of changes in spending in response to the latest policy, cost of living payments for recipients of mean-tested benefits. This makes use of bank transaction data to explore how quickly individuals spent these payments, and the types of goods and services they spent them on.

Chapter 4 looks at the quality and affordability of the private rental sector. We first note the increasing importance of the private rented sector for the living standards of lower-income people, with the sector filling the gap left by a shrinking social rented sector and, more recently, lower rates of owner-occupation. We then move on to examine the quality of private rented homes, noting that lower-income private renters are more likely to live in homes that are hazardous, difficult to heat and in a poor state of repair, compared with their social-renting and owner-occupying counterparts. Finally, we show a significant decline in the affordability of private rented housing in the last two years, as the local housing allowances which cap housing benefit have remained frozen while rents have increased dramatically. And we show that the shrinking pool of affordable properties are of lower quality than average.Living standards and inequality.

2. Living standards and inequality
Key findings
1. Average (median) disposable household income before deducting housing costs rose by 0.5% in 2021–22, but remained 1.2% lower than its pre-pandemic level. The relatively muted increase in 2021–22 reflected a 4.8% rebound in nominal incomes being largely offset by a sharp rise in inflation. A fall in housing costs over the pandemic means that average incomes measured after deducting housing costs were 0.2% higher in 2021–22 than in 2019–20.

2. Income growth was stronger among poorer households, with those in the bottom third of the distribution seeing a rise between 2019–20 and 2021–22 of 1.5% before deducting housing costs and 2.7% after deducting housing costs. Large falls in employment income among this group were more than offset by a rise in benefit incomes (in particular the temporary £20 uplift to universal credit) and a fall in housing costs, both of which affected low-income households more than households further up the income distribution.

3. The increase in benefit incomes among low-income households did not simply reflect a fall in employment income. Average benefit receipt in 2021–22 was higher than in 2019–20 at every level of earnings, due to the £20 universal credit uplift that persisted until October 2021 and the increased generosity of universal credit for in-work households from November 2021. The share of households in the bottom third of incomes that received disability benefits rose by 26%, from 12% in 2019–20 to 15% in 2021–22, driven entirely by an increase among working-age households.

4. Individuals aged 50–70 who moved from employment into economic inactivity in 2020–21 were more likely to end up in poverty (in the year of exit) than those who became inactive in previous years. This is despite poverty rates falling among 50- to 70-year-olds who had been inactive for more than a year (that is, it does not reflect an overall fall in living standards among inactive individuals in the age group). Measures of self-reported well-being also declined more for recently inactive individuals in 2020 than for those who had been inactive for longer. For people who became inactive in 2021–22, outcomes were much more similar to those seen among people who became inactive pre-pandemic, suggesting that there is particular cause for concern for the 2020–21 cohort.

5. This decline in living standards and well-being challenges the perception that exits into inactivity over the pandemic were driven by wealthy individuals who could afford to retire in comfort. Instead, many of those who left the workforce in 2020–21 may have been ‘forced’ into early retirement, with an associated hit to their living standards and well-being. People who become inactive at older ages often never re-enter the workforce, so it is likely that many in this cohort will experience persistently low living standards. In contrast, those who became inactive in 2021–22, when the labour market disruption and health risk had largely subsided, are more likely to have done so out of choice.


This chapter examines recent trends in and drivers of households’ living standards, with a particular focus on the impact of the COVID-19 pandemic in 2020–21 and 2021–22. We begin by reviewing trends in household incomes across the income distribution, documenting the effects of the onset of the pandemic and subsequent recovery and discussing their implications for income inequality. We then examine the sources of changes to household incomes in more detail, focusing on changes in income from employment and benefits across the income distribution, and setting post-pandemic trends in their recent historical context. Finally, we examine how the recent rise in economic inactivity among older individuals has affected their living standards and well-being.

We primarily rely on the Households Below Average Income (HBAI) statistics. To examine the living standards of recently inactive individuals, we also corroborate results using the HBAI data with data from Understanding Society: The UK Household Longitudinal Study (UKHLS), a panel survey that samples households at annual intervals. We also draw on the Annual Population Survey (APS) to track self-reported well-being measures among those who recently entered economic inactivity.

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