3rd April 2026
Families in the bottom decile of the income distribution will be at the sharp end of the latest development in the cost of living crisis, and changes to energy and fuel prices alone could mean they experience a rate of inflation almost a percentage point higher than households in the top income decile by the end of this year - according to new analysis released by the Resolution Foundation (Thursday 2 April 2026).
Happy new tax year 2026 weighs up the key personal finance changes in the new tax year against the backdrop of the impending price shock brought on by the conflict in the Middle East.
It notes that while families will feel the effects of another year of frozen tax thresholds - with £500 wiped off the personal tax allowance, as well as big, regressive increases in Council Tax - welcome increases to benefits and less-welcome rises in energy bills are likely to take centre stage.
The tax year has started with a welcome fall in Ofgem's price cap - reducing typical energy bills by £117 a year - but the good news won't last for long.
While there remains a high degree of uncertainty around the future path of energy bills, even a plausible best-case scenario - in which wholesale gas prices fall immediately to pre-war levels – would still mean around a £130 increase in the energy price cap in July. Alternatively, if the recent highs in gas prices become the norm for the remainder of the assessment period, the price cap could increase by close to £440, to around £2,100.
The burden of rising energy bills will fall unevenly. Poorer households in the second decile of the income distribution spend almost twice as much of their income on energy (11 per cent) as richer households in the ninth decile (6 per cent), meaning price rises in this area will hit poorer families hardest.
The report estimates that based purely on latest estimates of the energy-price shock a household in the bottom income decile would face an inflation rate of 3.8 per cent by the end of this year, compared with 2.9 per cent for the top decile – a gap of 0.9 percentage points. The gap would be greater still if the widely expected rise in food prices drives up inflation, as again poorer households spend more of their budgets on such essentials.
The analysis notes that these expected price rises will be softened for some lower income households by sorely needed benefit changes. Most notably, the end of the two-child limit will offer immediate relief to poorer families with three or more children, lifting 450,000 children out of poverty by the end of the decade.
Universal Credit will also see its first ever permanent real-terms increase – a landmark, if belated, step. However, after years of below-inflation rises, the value of unemployment support will still sit 5 per cent below its 2010 level. Over the same period the state pension has grown by 20 per cent.
The report cautions that with the conflict's path deeply uncertain it remains possible that energy bills remain elevated well into the winter. If this transpires, the Government should not rely solely on existing policies that raise benefits and reduce energy bills.
But the Government has time to act. With only 6 per cent of gas and 21 per cent of electricity consumption taking place between July and September these price increases would not bite fully until autumn. The Government should use this time to develop a social tariff on energy bills, providing targeted, temporary support based on household income should bills remain high come the winter.
Lalitha Try, Economist at the Resolution Foundation said:
"The cost of living crisis never ended for millions of households – and now a new price shock is on the way, care of the conflict in the Middle East.
"Once again, it is the poorest families who will feel it most. They spend more of their income on essential costs like energy and food, meaning they experience a materially higher inflation rate than their better-off peers.
"The Government's real-terms increase in Universal Credit this year is welcome and will go some way to reversing its historic erosion. But with energy bills set to rise sharply ministers should be preparing a social tariff that gives low-income households protection against the next price shock – and the one after that."
The start of April marks the beginning of the new tax year, meaning households will face a wide range of tax, benefit and utility bill changes. Benefit changes in April will boost incomes for the poorest families, particularly the removal of the two-child limit, which will give back £4,560 this year to the affected families. Unemployment benefits will, for the first time since 1983, be permanently uprated by more than the default inflation rate, but will still be 5 per cent lower in real terms than they were in 2010-11. And personal tax threshold freezes continue to drag down incomes, as do Council Tax rises.
Energy bills will fall in April, but the outlook for the year as a whole is very uncertain due to the war in Iran. The energy price cap will almost certainly rise in July: even in the plausible best-case scenario, annual bills would rise by around £130, and in a higher-price scenario bills could settle at close to £2,100, returning to a level at which the Government has historically intervened. Under Cornwall Insight's latest forecast, a typical household will be expected to spend £30 more on energy in Q3 than if the price cap had remained at its Q2 level, as 14 per cent of energy spending takes place in Q3. Given that lower-income households spend more of their income on energy and related costs (such as fuel and food) than higher-income ones, they will be hardest hit by this price rise, with households in the lowest income decile experiencing a rate of inflation that is 0.9 percentage points higher than that of the highest income decile.
A range of tax and benefit policies are coming into force this April, alongside changes in the energy price cap.[1] But this year there is much more uncertainty than usual: the impact of the war in Iran on oil and gas prices is a serious headwind to living standards in the UK over the coming months. This spotlight sets out some of the key changes that will affect household incomes in 2026-27, and how the conflict in the Middle East could affect this as the year goes on.
Some big benefit rises are set to boost incomes for low-income households
Three major benefit changes take effect in April 2026, and the impact of these is shown in Figure 1. The most important of these is abolishing the two-child limit – a much-needed step to bring down child poverty (and reduce a growing gap between poverty rates for children in families with three or more children and families with one or two children) and to eliminate a major unfairness in the benefit system. Its impact is significant: the Government estimates that the removal will bring child poverty down by 450,000 in 2029-30. In 2026-27, the average family who benefits from the two-child limit being scrapped will gain £4,560, pushing up the incomes of the poorest fifth of households by £290 on average.
There are smaller gains for all families receiving Universal Credit (UC), shown in the red bars in Figure 1. April 2026 marks the first of four years that the UC standard allowance will rise by more than inflation (an extra 2.3 per cent this year, with UC being 4.8 percent higher than it would have been otherwise by 2029-30), and the first time since UC was introduced that it has been increased by more than the previous September's inflation rate or by more than the State Pension. The UC standard allowance will rise by £6 a week, which will increase incomes for the bottom fifth by £90 on average. This above-inflation uprating will cost the Government £810 million in 2026-27, while abolishing the two-child limit costs £2.4 billion in 2026-27, rising to £3.1 billion by 2029-30.
This over-indexation of UC is taking place as part of the Government’s plans to shift the balance of social security entitlements away from incapacity benefits and towards the standard element of UC.[3] The flip side is that from April 2026, new UC Health claimants will receive a health element that is half the rate of that for existing claimants, at £50 a week. For existing claimants, UC Health will rise by 1.5 per cent (as opposed to 3.8 per cent, September 2025’s rate of inflation), so that their combined UC award will rise by inflation. These changes will reduce incomes in the bottom fifth of the income distribution by an average of £40 (the green bars in Figure 1), although the losses (compared to a world without these changes) will clearly be much greater among the new claimants of UC Health that are directly affected.
The standard allowance of UC will rise this year, but this still leaves unemployment benefits 5 per cent lower than they were in 2010-11
Happy new tax year 2026 - Read the full report HERE