UK disposable incomes squeezed by price rises and tax changes

UK households suffered a drop in disposable incomes in the first three months of the year as price rises and extra wealth taxes hit average spending power.

The Office for National Statistics said a rise in the consumer prices index (CPI) measure of inflation in the first quarter and higher capital gains tax receipts reduced real household disposable income by 0.8% from January to the end of March.

It marked the fourth quarter in the last five when disposable incomes have fallen, the ONS said in its latest assessment of the economy.

The statistics body confirmed early estimates that showed the economy growing by 0.6% in the first quarter, but GDP growth over last year was revised down slightly from 1.4% to 1.3%.

All three main sectors of the economy – services, production and construction – grew in the first quarter of this year, the ONS said, with the largest contribution from services, which expanded by 0.8%.

Thomas Watts, an investment manager at the private bank Julius Baer, said the figures represented a boost for Rachel Reeves in what are expected to be her last weeks as chancellor.

“Encouragingly, the composition of growth was more balanced than in recent quarters. Both construction and production posted gains of 0.2%, signalling a modest but welcome broadening in economic momentum,” he said.

“The fact that all three main sectors contributed positively will be particularly reassuring for policymakers, both at Threadneedle Street and in Downing Street.”

The household saving ratio, which measures the proportion of disposable income that households save rather than spend, edged down marginally from 9.6% in the last three months of 2025 to 8.9%.

Households pushed the saving ratio to 27.5% during the pandemic lockdowns, when they were unable to spend much of their income, and increased it again during the politically unstable period before the last election, after which it has steadily declined, though it remains above pre-pandemic levels.

Phil Shaw, an economist at Investec, said the first quarter “marked a decent start to 2026”, but predicted that attention would soon turn to the negative impact from the recent rise in energy prices.

“We envisage growth coming close to a halt in the third quarter, although the level of the saving ratio will give households in aggregate a cushion to absorb cost increases without an abrupt interruption in spending,” he said. “Thereafter the unwinding of the energy price spike should form a tailwind and help to support expenditure and economy activity more widely.”

He added that the Bank of England was likely to view the figures as showing the economy remains robust, although without the prospect of much growth in the next six months, allowing it to avoid interest rate rises.

Shaw said: “We have lowered our forecast of the peak in inflation over the remainder of the year from 4.0% to 3.1% … Nevertheless we still consider that the [Bank] will adopt a cautious approach to policy and guard against lingering threats of more persistent inflationary pressures.

“We remain of the view that a rate increase is off the table, but that the committee will maintain the Bank rate at 3.75% for the remainder of the year, with rate cuts coming into view over 2027.”