UK households save less under tax pressure

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UK household saving behaviour is beginning to shift as tax policy and slowing growth squeeze disposable incomes. According to the Office for National Statistics, the share of disposable income saved by consumers fell to 9.5% in the third quarter from 10.2% in the previous three months. This marked the first time in over a year that the saving ratio dropped below 10%, signalling mounting pressure on household finances.

Higher taxes weigh on incomes

The decline in savings was driven primarily by rising tax burdens. Household incomes were hit by an estimated £6 billion increase in taxes during the quarter. Real household disposable income per head fell by 0.8%, largely due to higher taxes on income and wealth. The ONS also noted that frozen tax thresholds boosted receipts from employment and self-employment, limiting households’ ability to put money aside.

Economic momentum weakens

At the same time, the UK economy is losing momentum. Growth slowed sharply to 0.1% in the third quarter following a strong first half of the year. Revised data showed that second-quarter growth was also weaker than previously estimated, at 0.2% instead of 0.3%. Together, these figures reinforce concerns that economic activity is close to stalling.

Consumers remain cautious despite rate cuts

Even as interest rates edge lower, households remain reluctant to increase spending. Bank of England Governor Andrew Bailey recently acknowledged that consumers continue to act cautiously after the central bank cut rates to their lowest level since early 2023. This behaviour contrasts with that of US households, which have maintained stronger consumption patterns.

Budget choices shape the outlook

The outlook is further shaped by recent fiscal decisions. Chancellor Rachel Reeves confirmed in November that personal tax thresholds will remain frozen for another three years, one of the government’s main revenue-raising measures. While the £26 billion of announced tax rises are largely backloaded, short-term relief on energy bills and rail fares is expected to ease pressure on households. The Bank of England estimates these measures could bring inflation close to its 2% target by next spring.

As International Investment experts report, the fall in the UK saving ratio highlights growing strain on household balance sheets amid higher taxes and weak growth. With consumer caution persisting, future economic expansion is likely to depend more on fiscal policy support and confidence effects than on a spontaneous rebound in household spending.