How the budget could make matters worse for millions of working people with extreme money problems

Lowri Williams is struggling to cover her basic costs. She earns a low income with very little support and says she feels like she is “living from hand to mouth” and barely making ends meet.

She belongs to a large group of people in low-income households who are in a precarious position. They earn too little to support themselves comfortably, but too much to qualify for significant financial assistance.

For people like Lowri, working more or earning a higher income could mean losing vital support like Universal Credit, leaving them no better off and in some cases even worse off.

Higher tax bills for the lowest paid

Lowri’s salary is not high enough to pay taxes. But there is a broader group of low-income people who face a heavy tax burden.

An analysis by Sky News shows that working people in the bottom 25% of earners have effectively suffered a 60% tax increase over the past three years.

This is due to the freezing personal allowances introduced in 2021 and ending in 2028. For every year the freeze takes effect, earners will actually see their tax rates increase real terms as more of their income becomes taxable.

Labor could extend its budget freeze this week. If the Chancellor goes ahead with the plan, around 400,000 people who are currently exempt will have to pay income tax, and many current taxpayers will pay higher rates.

Furthermore, low to middle income households are seeing significant stagnation in the rate at which their incomes rise, according to an analysis of data from the Resolution Foundation’s Department for Work and Pensions (DWP).

This finding is part of an upcoming report in November, obtained by Sky News, which will delve deeper into the financial pressures these households face.

Between the mid-1990s and early 2000s, low- to middle-income households experienced an income increase of almost 50%. But over the past decade, that growth has slowed dramatically to just 11%.

Fluctuating income and pressure on benefits

The government is also reportedly considering limiting sick pay, a move that could worsen the problem.

“Economic vulnerability and insecurity are particularly high among people with poor health or disability,” said Alfie Stirling, director of insights and policy at the Joseph Rowntree Foundation.

“Any policies that reduce their support, or limit access to it, are likely to worsen hardship and increase the number of people at risk,” he added.

Low-income families in these situations can receive state support such as Universal Credit to supplement their income.

First introduced in 2013, Universal Credit combines several state-funded benefits, including housing support, child tax credits and income support, into one payment. It offers support to households, both with and without work.

About 2.5 million people in work receive this support, but some, like Lowri, a part-time charity worker, sometimes miss out due to fluctuating monthly income.

Universal credit is reduced by 55p for every £1 earned, a calculation known as the taper rate. Some people will receive benefits before this reduction, depending on their circumstances.

Lowri, who is affected by the phase-out rate, explains: ‘If you earn above the limit, you immediately lose. Not only will you lose Universal Credit, but you will also lose your council tax benefit, which is a further £150 per month.

“So while you might earn £50 more, you could end up being £100 worse off.”

“Every penny you take in is paying bills,” she said.

Find ways to save

Below are Lowri’s household expenses for some essential bills.

Although she can receive UC, she is eligible for social rates, a package of discounts on household bills, which can help her save.

According to analysis from Nous, an AI-powered bill tracking tool, this could equate to a saving of almost £70 on Lowri’s mobile and broadband budget.

If social rates apply, her water bill could be halved.

The national living wage

Although Lowri’s income means she pays no tax, people on the National Living Wage (NLW), £11.44 per hour (£22,308 per year), who earn more than her, are hit hard by Conservative tax and benefit decisions government. , which Labor is reportedly proposing to extend.

In the March budget, the NLW increased by 10%.

The Chancellor could announce a further increase in the NLW at this week’s Budget, which sounds like good news.

But Lalitha Try, economist at the Resolution Foundation, said: ‘Our research shows that the introduction and increase of the minimum wage over the past 25 years has delivered a large increase in living standards for lower-income families.

“But it is important to recognize that there are limits to what it can achieve. For workers on Universal Credit, more than half of wage gains will be clawed back through reduced benefit entitlement.

And the minimum wage cannot help those who may earn more than the legal minimum but struggle with low hours or high housing costs. Other policies are needed to solve these challenges.”

Losing access to support like Universal Credit could also mean people no longer qualify for things like social rates and free school meals.

Furthermore, the freeze on personal allowance thresholds, which is hitting the bottom 25% of earners in Britain hard, has also had a significant impact on people earning NLW.

The amount of tax that someone working full-time on a living wage will pay annually in 2024/2025 is more than £1,000 more in real terms than in 2019/2020.

That’s a lot of money for someone who earns just over £22,000 a year.

It means their effective tax rate has almost doubled in five years, from 4.4% to 8.7%.

These are just a few examples of how an increase in NLW means they have less money in their pockets.

Two salaries and still struggling

It’s a similar story for people about what’s meant to be a more comfortable income.

Chris and Tracey Matthewman, who live with their three daughters in Basildon, Essex, are among the tens of millions of people living below the Minimum Income Standard (MIS).

This is the amount that the Joseph Rowntree Foundation considers necessary for an acceptable standard of living.

It goes beyond just food, clothing and shelter; it includes the ability to participate in society, such as being able to socialize and have access to technology.

In 2024, the MIS was £28,000 for a single person and £69,400 for a married couple with two children.

Tracey teaches at an elementary school and Chris takes care of his company’s fleet.

Matthewman’s family income is below the Minimum Income Standard (MIS) for a family of their size, totaling just over £80,000.

After tax, their combined household income is around £4,000 per month. Much of this is spent on energy bills and council taxes, not to mention other essentials.

Chris is clearly worried about how to keep the family afloat. When I visited his home, he repeatedly showed me his detailed spreadsheet, which he uses to meticulously track his family’s expenses.

Chris says, “It’s frustrating. We have to take one paycheck after another and just survive from month to month.”

And Tracey had this message for Rachel Reeves, the chancellor, ahead of Labour’s budget: “They need to remember that there are people living in this country who are not receiving any benefits and are still struggling.”

“We are in that demographic group that ends up paying more: more national insurance, more taxes. We keep tightening the rules, but we don’t qualify for any benefits. That’s difficult.”

Additional reporting: Daniel Dunford, senior data journalist

The Data and forensics team is a multi-faceted unit dedicated to delivering transparent journalism from Sky News. We collect, analyze and visualize data to tell data-driven stories. We combine traditional reporting skills with advanced analysis of satellite imagery, social media and other open source information. We want to better explain the world through multimedia stories and at the same time show how our journalism works.