How the budget could make things worse for millions of working people with extreme money troubles
Lowri Williams is struggling to cover her basic expenses. Earning a low income with very little support, she says she feels like she’s “living hand-to-mouth” and barely getting by.
She’s one of a large group of people in low-income households who are caught in a precarious position, earning too little to comfortably support themselves, but too much to qualify for significant financial help.
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.
Lowri Williams in her home
Higher tax bills for the lowest paid
Lowri’s salary is not high enough to pay tax. But there’s a wider group of low-income earners who are facing a heavy tax burden.
Sky News analysis has found that in the last three years, working people in the bottom 25% of earners have effectively had a 60% tax hike.
This is due to the freeze on personal allowances, introduced in 2021 and scheduled to end in 2028. For each year the freeze is enacted, earners effectively see their tax rates rise in real terms as a higher proportion of their income becomes taxable.
Labour may extend the freeze in their budget this week. If the chancellor proceeds with the plan, around 400,000 people who are currently exempt will find themselves paying income tax, and many current taxpayers will pay higher rates.
On top of this, low to middle-income households are seeing significant stagnation in how much their income is going up, according to analysis of Department for Work and Pensions (DWP) data by the Resolution Foundation.
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 almost 50% rise in income. But in the last decade, that growth has slowed dramatically to just 11%.
Fluctuating earnings and a squeeze on benefits
The government is also reportedly considering restricting sickness benefits, a move which may exacerbate the issue.
“Economic vulnerability and insecurity are particularly high among people with ill health or disabilities,” said Alfie Stirling, director of insight and policy at the Joseph Rowntree Foundation.
“Any policy that reduces their support, or limits access to it, will likely worsen hardship and increase the number of people at risk,” he added.
Low income families in these situations can receive state support like Universal Credit to supplement their income.
Universal Credit, first introduced in 2013, combines several state-funded benefits, including housing support, child tax credits, and income support, into one payment. It provides support to households both in and out of work.
Around 2.5 million people in work receive this support, but some, like Lowri, a part-time charity worker, miss out at times due to fluctuating monthly earnings.
Universal Credit is reduced by 55p for every £1 earned, a calculation known as the taper rate. Some people receive an allowance before this reduction, depending on their circumstances.
Lowri, who is impacted by the taper rate, explained: “If you earn over the limit, you lose out immediately. Not only do you lose Universal Credit, but also your council tax benefit, which is another £150 a month.
“So, while you might earn £50 more, you could end up £100 worse off.”
“Every penny you have coming in is paying just bills,” she said.
Finding ways to save
Below is Lowri’s household expenditure for some essential bills.
While she’s able to receive UC, she’s eligible for social tariffs, which are a discounted package for household bills, which could help her save.
This could amount to a saving of nearly £70 for Lowri’s mobile and broadband budget, according to analysis by Nous, an AI-powered bill-tracking tool.
With social tariffs in place, her water bill could be cut in half.
The National Living Wage
While Lowri’s income means she doesn’t pay tax, people on the National Living Wage (NLW), £11.44 per hour (£22,308 annually), who earn more than her, are heavily affected by tax and benefits decisions made by the Conservative government, which Labour are reportedly proposing to extend.
At the budget in March, the NLW increased by 10%.
The chancellor may announce a further hike in the NLW at this week’s budget, which sounds like good news.
But Lalitha Try, economist at the Resolution Foundation says: “Our research shows that the introduction and ramping up of the minimum wage has delivered a major living standards boost to lower income families over the past 25 years.
“But it’s important to recognise that there are limits to what it can achieve. For workers on Universal Credit, over half of the wage gains will be clawed back through lower benefit entitlement.
And the minimum wage can’t 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 those challenges.”
Losing access to support like Universal Credit could also mean people no longer qualify for things like social tariffs and free school meals.
On top of that, the freezing of the personal allowance thresholds which heavily affects the lowest 25% of earners in the UK has also had a significant impact on people earning the NLW.
The amount of tax that someone working full time on the living wage will pay annually in 2024/2025 is over £1,000 more in real terms than it was in 2019/2020.
That’s a lot of money for someone earning just over £22,000 per year.
It means their effective tax rate has almost doubled, from 4.4% to 8.7%, in five years.
These are only a few examples of how an increase in NLW means they have less money in their pockets.
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How much does this family spend per month?
Two salaries and still struggling
It’s a similar story for people on what is 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 the Joseph Rowntree Foundation defines as 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 socialise and having access to technology.
In 2024, the MIS was £28,000 for a single person and £69,400 for a couple with two children.
Tracey teaches in a primary school and Chris looks after the fleet of vehicles his company uses.
The Matthewman family
The Matthewman household income is below the Minimum Income Standard (MIS) for a family of their size, a little over £80,000 in total.
After tax, their combined household income is around £4,000 a month. A lot of that gets spent on energy bills and council tax, 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 accept living paycheque to paycheque, just surviving 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 don’t receive any benefits and are still struggling.”
“We’re in that demographic that ends up paying more – more national insurance, more tax. We keep tightening up, but we’re not eligible for any benefits. That’s tough.”
Additional reporting: Daniel Dunford, Senior Data Journalist
The Data and Forensics team is a multi-skilled unit dedicated to providing transparent journalism from Sky News. We gather, analyse and visualise data to tell data-driven stories. We combine traditional reporting skills with advanced analysis of satellite images, social media and other open source information. Through multimedia storytelling, we aim to better explain the world while also showing how our journalism is done.
After hitting the highest level this century on Tuesday, the cost of long term UK government borrowing has now hit a fresh 27-year high.
The interest rate demanded by investors on the state’s long-dated borrowing (30-year bonds) rose to just below 5.75%, surpassing the 5.72% peak reached on Tuesday, pushing it to a high not seen since May 1998.
It comes as the government auctioned off these long-term loans on Tuesday and was forced to pay a premium to do so.
Issuing bonds is a routine way states raise money.
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As well as meaning the state has to pay more to borrow money, high interest rates on debt can signify reduced investor confidence in the ability of the UK to pay back these loans.
As the trading session continued, the interest rates on long-term government bonds, known as gilt yields, fell back to just above 5.66%, not enough to erase two days of rises.
The benchmark for state borrowing costs, the interest rate on 10-year bonds, also saw rises. The yield rose above 4.8% for the first time since January, before slightly falling back
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Why did UK debt just get more expensive?
The spiked borrowing cost also continued to cause a weakening in the pound.
After an initial fall to a month-long low against the dollar, one pound again buys $1.34.
It means sterling goes less far in dollars than before the latest peak in interest rates on government bonds. On Monday, sterling could buy $1.35.
Sterling dropped to equal €1.14 before easing up to €1.15. Just a few months earlier, a pound could buy €1.19 before Donald Trump’s April country-specific tariff announcements.
So why has this happened?
Government borrowing costs have been rising across the world amid a sell-off in bonds – which prompts investors to look for a higher return to hold them.
High inflation and national debts have increased concern about whether states can pay back the money.
Japan’s long-term borrowing cost hit a record high, while the yield on the US’s benchmark 10-year bond hit the 5% mark for the first time since July.
UK bond yields tend to follow the US.
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Key to easing UK borrowing costs was the announcement of the date of the budget on Wednesday morning.
UK public finances had been a worry for markets as Chancellor Rachel Reeves struggles to stick to her fiscal rules to bring down the debt and balance the budget.
Disquiet around comparatively low growth in the UK economy also played a role.
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