Disposable income at lowest level in 10 years

While the UK enjoys a rise in overall income, disposable income hits its lowest level since 1997 due to rising taxes and essential living costs.

Hikes in taxes, utility bills and social contributions over the last decade have outpaced the overall rise in income levels, to push disposable income in the UK to its lowest level since 1997. The findings are announced by uSwitch.com, following a report on changing income levels and household outgoings over the last 10 years.

With taxes having risen by 85% and social contributions by 77%, net household income as a proportion of gross household income has fallen by 5%. Ten years ago, net household income accounted for 68% of gross income, whereas today it accounts for just 63%.

The report also reveals that, despite an increased ‘need’ for recreation, due to longer working hours and higher stress levels, households now have a smaller chunk to spend on ‘non-essential’ items than at any other time during the last decade. Disposable household income in 1997 accounted for 35% of gross household income (£12,000), but today, at £17,000, it accounts for just 33%.

Mike Naylor, Personal Finance expert at uSwitch.com, said: “Cool Britannia is now Cost-a-lot Britannia. Our pay cheques may be getting fatter, but the chunk that we have to hand over to pay taxes, bills and other living costs is growing even faster. We are working harder, but we are not getting any wealthier – we are running just to stand still.”

Rising cost of living

The report by uSwitch.com highlights that the areas where consumers spend most money – housing, transport and recreation – are the ones that have been hit hardest over the last decade.

Housing

Over the last 10 years, house prices have grown by 231% - five times faster than salaries. Rent has also shot up by 44%. As a result, housing costs continue to take the biggest chunk of gross household income, accounting for 19% of our expenditure.

A 92% increase in council tax – band D properties increased from £688 in 1997 to £1,321 today – hits housing spend even harder.

The Bank of England base rate, which at 5.75% is currently at its highest level since 2001, compounds the issue as borrowing is becoming more expensive. Including mortgages, the average household owes £56,000. With UK personal debt exceeding £1.25 trillion for the first time in September and rising at a rate of £1 million every 4 minutes, the average UK consumer now owes over twice as much as the average European.

Transport

Transport accounts for 15% of our expenditure, from the general upkeep of a car, to spend on fuel and public transport – up by 43%, 55% and 49% respectively.

Recreation

Households increasingly have more than one person working full-time and, in the spirit of ‘work hard, play hard’, spending is up by 55% on hotels and restaurants, and by 48% on entertainment – be it plasma screens, DVDs and stereos or entrance to sports events and art galleries. Recreation now accounts for nearly a quarter (24%) of our expenditure and costs in this sector have seen an overall rise of 46% over the last 10 years.

Utility Costs

Communication costs, due to increased dependency on the internet and mobile phones, have rocketed by 77% since 1997. Water costs have risen by 33% over the same timescale, with particularly steep increases since 2003. Electricity now costs 17% more than it did in 1997 and between 2002 and 2006 electricity prices increased by 50%.

uSwitch.com’s study also reveals huge disparities in disposable income between towns and cities across the UK. While some parts of the country spend a modest 33% of their net income on household bills, others see almost twice as much disappear on the essentials. With up to 64% of net income being swallowed up by household bills, many consumers are seeing ever larger proportions of their salaries being eaten up. In 2005, nearly three quarters of the country (73%) were left with a disposable income below the national average of £16,262.

In the meantime, some areas are becoming richer. For example, 68% of towns studied in the South East have above national average disposable incomes.

Nottingham households fare worst, spending 64% of their net income on bills such as rent/mortgage, running a car, food, utilities and insurance – more than anywhere else in the country.

Stoke-on-Trent, Hull, Sunderland and Blackpool aren’t far behind seeing 60% of their take home pay going on bills.

Meanwhile traditionally prosperous areas such as Surrey and Buckinghamshire lose just 36% of their wages to living costs.

With some income levels lagging behind the national average, certain occupational groups are feeling the drop in spending money more keenly than others.

In the past decade, the average gross income of nurses and midwives has grown at a rate of 39%, 7% less than the national average. Nurses earning £19,155 who live in the North East pay a tax bill of £4,830, rent of £2,360 and other living costs of £11,645, leaving just 2% of their salary to enjoy, compared with 5% in 2000.

Between 2001 and 2005, the Armed Forces witnessed a gross income increase of 15%, from £22,293 to £25,631. Over the same time, average national gross household income increased by 17%, from £42,095 to £49,335.

On the other hand, the average salary for a qualified teacher in England and Wales has increased from £21,550 in 1995 to £32,760 in 2007 – a growth of 52%.

The UK has seen the first substantial increase since 1998 in the number of people living below 60% of the national average household income – up by 700,000. For the first time there has also been an increase in those living under the 50% threshold 75% of the extra money earned over the decade has gone to those on above-average incomes, with 33% going to the richest tenth in the country.

Mike Naylor continues: “With less spending money than at any time over the last 10 years, it’s more important than ever to take control of your finances. By acting smarter and shopping around for the best deals on the market, consumers can spend more of their hard-earned salaries on the nicer things in life.”

According to uSwitch.com, households can save up to £1,000 on household bills and financial products through a simple financial makeover.

Take control of your finances by looking at all the areas where you can save money. Don’t see it as a chore – see it as an opportunity. By saving on your outgoings, you are actually increasing your disposable income.

Be proactive, not reactive. Instead of just cutting back on basics or using credit/store cards to get you through the winter, take the opportunity to cut the cost of your basics (energy, home and mobile phones) throughout the year and check rates on credit cards, loans and insurance.

Above all, stay in control. It’s easy in the face of feeling impoverished to let go of the spending reins altogether. Recognise that risk and don’t fall victim to it – otherwise the ‘skint cycle’ just gets prolonged.

Keep your eye on the prize! Work out your monthly income and outgoings so you know your disposable income. Look at how much you could save by switching. Then look at that amount as a percentage of your disposable income and imagine how chuffed you would be if your boss offered you a pay rise of that magnitude. Never forget that every saving made is a boost to your disposable income.

The most important thing is don’t feel impoverished – feel empowered!

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Save up to £150 a year on car insurance
Save up to £200 a year on your home phone
Save up to £120 a year on broadband
Save up to £113 a year on your mobile
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Save up to £387 over 5 years on your personal loan
Save up to £83 over 12 months on your current account