Resolution Foundation warns of ‘triple hit’ from frozen tax thresholds, council tax rises and soaring energy bills as new tax year begins, with poorest families feeling the impact most

A leading think-tank has predicted that working-age households will be approximately £500 worse off on average over the coming year as a result of frozen income tax thresholds. It is the most financially vulnerable who stand to bear the greatest burden – a newly published report by the Resolution Foundation, released ahead of the new tax year, found that the bottom 10 per cent of earners will be at the ‘sharp end’.

The report stated that shifts in energy and fuel prices alone could mean lower-income households experience a rate of inflation almost a percentage point higher than those in the top income ten per cent by the close of this year – according to fresh analysis published by the Resolution Foundation.

The Resolution Foundation has cautioned of a “triple hit” as the new tax year gets under way in April, with households contending with the combined pressures of taxation, rising utility bills, and substantial increases to council tax. It noted that families in particular will be around £500 worse off owing to the freeze on the personal tax allowance.

In the November budget Chancellor Rachel Reeves extended the tax thresholds freeze to 2031. For the 2026/27 tax year, the standard UK Personal Allowance remains frozen at £12,570, meaning no income tax is paid on earnings up to this amount. The basic rate (20%) applies up to £50,270, higher rate (40%) up to £125,140, and additional rate (45%) on income above £125,140.

The think-tank further warned that ‘big, regressive’ rises in Council Tax fail to offset ‘welcome’ increases to benefits, with surging energy bills likely to pose a significant challenge. While acknowledging that the tax year has begun with a reduction in Ofgem’s price cap – cutting typical energy bills by £117 a year – it cautioned that ‘the good news won’t last for long’. It stated: “While there remains a high degree of uncertainty around the future path of energy bills, even a plausible best-case scenario – in which wholesale gas prices fall immediately to pre-war levels – would still mean around a £130 increase in the energy price cap in July. Alternatively, if the recent highs in gas prices become the norm for the remainder of the assessment period, the price cap could increase by close to £440, to around £2,100.”

Lalitha Try, Economist at the Resolution Foundation, said: “The cost of living crisis never ended for millions of households – and now a new price shock is on the way, care of the conflict in the Middle East.”

“Once again, it is the poorest families who will feel it most. They spend more of their income on essential costs like energy and food, meaning they experience a materially higher inflation rate than their better-off peers.

“The Government’s real-terms increase in Universal Credit this year is welcome and will go some way to reversing its historic erosion. But with energy bills set to rise sharply ministers should be preparing a social tariff that gives low-income households protection against the next price shock – and the one after that.” The report highlighted that, regarding energy bills, poorer households in the second decile of the income distribution spend almost twice as much of their income on energy (11 per cent) compared with wealthier households in the ninth decile (6 per cent), meaning price increases in this area will disproportionately affect lower-income families.

The report estimates that based purely on latest estimates of the energy-price shock a household in the bottom income 10 per cent would face an inflation rate of 3.8 per cent by the end of this year, compared with 2.9 per cent for the top 10 – per cent – a gap of 0.9 percentage points. This disparity would widen further should the broadly anticipated rise in food prices push inflation higher, as once again less affluent households allocate a greater proportion of their budgets to such necessities.

The analysis acknowledges that these anticipated price increases will be partially cushioned for some lower-income households through much-needed benefit reforms. Most significantly, the abolition of the two-child limit will provide immediate relief to struggling families with three or more children, lifting 450,000 children out of poverty by the end of the decade.

It said: “Universal Credit will also see its first ever permanent real-terms increase – a landmark, if belated, step. However, after years of below-inflation rises, the value of unemployment support will still sit 5 per cent below its 2010 level. Over the same period the state pension has grown by 20 per cent.” The report warns that, given the deeply uncertain trajectory of the conflict, energy bills could feasibly remain elevated well into the winter. Should this occur, it stated: “the Government should not rely solely on existing policies that raise benefits and reduce energy bills.

“But the Government has time to act. With only 6 per cent of gas and 21 per cent of electricity consumption taking place between July and September these price increases would not bite fully until autumn. The Government should use this time to develop a social tariff on energy bills, providing targeted, temporary support based on household income should bills remain high come the winter.”

Prime Minister Sir Keir has previously pledged to keep a planned rise in fuel duty from September “under review in light of what’s happening in Iran”, while the Government has intensified its efforts to assist motorists in locating the cheapest fuel in their area via a price comparison website.

Opposition parties, however, have demanded more urgent action, setting out their own proposals to reduce petrol prices and household energy bills as families brace themselves for potential energy bill increases later this year.

The Conservatives have called for VAT on energy bills to be scrapped for the next three years, Reform UK has pledged to reduce VAT on fuel and eliminate green levies on energy bills, while the Liberal Democrats have proposed a 10p reduction in fuel duty.