UK household disposable incomes fell sharply in the first quarter of 2026 as rising prices and tax increases outpaced wage growth, according to official data. Real household disposable income per capita dropped by 1.2% compared with the previous three months, the Office for National Statistics (ONS) reported.
Price rises and tax hikes squeeze budgets
The decline was driven by a combination of higher consumer prices and increases in taxes, including national insurance contributions and council tax. The ONS noted that while nominal wages rose, they failed to keep pace with inflation and the rising tax burden. The consumer prices index (CPI) inflation remained above the Bank of England's 2% target, at 3.4% in the first quarter.
Chancellor of the Exchequer Rachel Reeves said the figures reflected the "challenges" facing households but insisted the government's economic plan was working. "We are taking the tough decisions needed to fix the foundations of our economy," she said. "In the long term, our plan will deliver higher growth and lower taxes."
GDP growth revised down
The ONS also revised down its estimate of GDP growth for the first quarter, to 0.4% from an initial estimate of 0.6%. The downward revision was attributed to weaker-than-expected performance in the services and construction sectors. The data adds to concerns that the UK economy is struggling to gain momentum after a mild recession in the second half of 2025.
"The squeeze on household incomes is the key story," said Paul Dales, chief UK economist at Capital Economics. "With inflation stickier than expected and tax rises biting, consumers are feeling the pain. This will likely keep GDP growth subdued in the near term."
Tax increases take effect
The tax burden has risen to its highest level since the 1940s, with increases in national insurance contributions for employers and employees, as well as higher council tax bills in many areas. The ONS data shows that the effective tax rate on household income rose to 37.4% in the first quarter, up from 36.8% in the previous quarter.
Shadow chancellor Jeremy Hunt blamed the government's policies for the squeeze. "Labour's tax rises are hitting families hard," he said. "They promised to protect working people, but instead they are making them poorer."
Savings rate falls
The household savings ratio fell to 8.2% from 9.1% in the previous quarter, indicating that families are dipping into savings to maintain spending. Consumer spending grew by 0.3% in the first quarter, but this was driven by essential items such as food and energy, rather than discretionary purchases.
"The fall in the savings rate suggests that households are becoming less cautious, but that may not be sustainable if incomes continue to be squeezed," said Dales.
Outlook remains uncertain
The Bank of England is expected to keep interest rates on hold at 4.5% at its next meeting, as it balances the need to control inflation with the risk of further weakening the economy. Some economists predict that the Bank may cut rates later this year if the economy weakens further.
"The data reinforces the view that the economy is stuck in a low-growth trap," said Ruth Gregory, deputy chief UK economist at Capital Economics. "We expect GDP growth to remain below trend for the rest of the year, with risks skewed to the downside."
