Large-scale study reveals scale of debt crisis among low-income households

A large-scale study of households on low incomes has revealed the extent of the debt crisis hanging over the UK’s poorest families as the country braces to weather a cost-of-living crisis.

The study reveals that:

  • The number of low-income households in arrears has tripled since pandemic hit
  • 4 in 10 working-age low-income households fell behind on bills during pandemic
  • Millions are behind on rent and bills and have had to take on new borrowing
  • JRF calls for urgent action to support low-income families through cost-of-living crisis and prevent worsening wealth inequality

The analysis looks at households in the bottom 40% of incomes in the UK – those with a household income of £24,752 or less.[1] This represents around 11.6 million households.

It estimates that 3.8 million such households are in arrears with household bills, totalling £5.2bn. 950,000 are in rent arrears; 1.4 million are behind on council tax bills; and 1.4 million are behind on electricity and gas bills. 33% of low-income households are now in arrears, which is triple the 11% estimated by a similar study prior to the pandemic.[2]

Working-age households on low incomes (those aged 18-64) have been particularly hard hit: 44% are in arrears. For households aged 18-24 this rises to almost three-quarters (71%) of people being in arrears. The survey shows clear signs that the profound financial impact of the pandemic has dragged families who were previously just about managing into arrears on essential bills. A large majority of households who are now behind on their household bills (87%) said that they were always or often able to pay all their bills in full and on time before the pandemic hit.

This is not surprising given people on low incomes were more likely to lose income during the pandemic due to job loss, reduced hours or being furloughed. Even before recent energy price rises began to bite, six in ten households on low incomes (62%) reported that their costs increased during the pandemic.

The other clear trend in the survey is the increased borrowing taken on by households on low incomes. Around 4.4million such households have taken on new or increased borrowing, and their total amount of borrowing comes to an estimated £9.5bn. 69% of households with new or increased borrowing are also in arrears.

The study highlights groups that have been hit particularly hard. Over half of the households in the following groups have been pulled into arrears:

  • Families with children (55%)
  • Households in London (55%)
  • Households with a person under 45 answering the survey (56%)
  • Black, Asian and minority ethnic households (58%)

Many families on low incomes are still reeling from the huge £20 per week cut to Universal Credit and Working Tax Credit earlier in the month. It is worrying that the survey was conducted in September when many of the households surveyed received the uplift which has now been removed. Energy bills and other costs are continuing to rise, with the price of energy projected to soar further in the coming months. An increase in National Insurance contributions next April is another extra cost many working people will face.

Of the households surveyed who receive Universal Credit, 40% are not confident they will be able to pay their bills in full and on time, while 35% don’t think they will be able to avoid taking on more debt. Half (50%) of these households say they do not feel confident they can find a job or work more hours, calling into question the Government’s insistence on jobs as the only solution.

The comparison between how poorer and wealthier households have fared during the pandemic is striking. The Bank of England[2] found that wealthier households have tended to accumulate savings during the pandemic. [3] These households were more likely to stay in work and to be able to work from home, reducing daily costs, and to save money during lockdown due to enforced saving. Homeowners also benefited from rising house prices.

JRF is urging the Government to put in place a package of support at the Budget to ease pressure on low-income households and prevent further debt. As well as urging the Government to reinstate the £20 in Universal Credit, the report also recommends that the Government provide at least £500m additional grant funding via the Household Support Fund for targeted debt relief. It is also essential to address the systemic drivers of debt including through writing off Tax Credit debts when people move onto Universal Credit and addressing Universal Credit advance repayments that many households have no option but to take on during the five-week wait for the first payment. This flaw in the design of the benefit has long been criticised by food banks and anti-poverty groups for causing ‘destitution by design.’

Katie Schmuecker, Deputy Director for Policy & Partnerships at JRF said:

“There is a debt crisis hanging over millions of families on low incomes. Behind these figures are parents gripped by anxiety, wondering how they will put food on their children’s plates and pay the gas bill; young people forced to rely on friends to help cover their rent and avoid eviction.

“While many households on higher incomes have enjoyed increased savings and rising house prices during the pandemic, people on low incomes are under serious financial pressure that shows no sign of abating. As a society, we believe in protecting one another from harm. As costs pile up and incomes have been cut, we urgently need to rethink the support in place for people at the sharp end of the cost of living crisis.

“The Budget is about priorities. We know the Chancellor is capable of taking bold action to protect people from harm when it is required. Reinstating the £20 per week increase to Universal Credit and boosting funding for councils to tackle debt must be priorities in next week’s Budget. We must give families the firm foundations they need to flourish and take part in our economic recovery.”

[1] Income adjusted for household size and composition