Overview

British household wealth has been on a rollercoaster ride in recent years. In Q1 2024, it was estimated to be worth more than six times GDP (630 per cent), more than 50 per cent higher than the last time Labour came into power (410 per cent in 1997). The key driver of this huge rise in wealth is unearned passive gains. These gains have stretched the gap between the wealthy ‘haves’ and the less fortunate ‘have nots’: today, families in the top tenth of the wealth distribution have £1.3 million more in wealth per adult on average than those around the middle (fifth decile). Yet, despite huge increases in wealth, revenues raised from wealth-related taxes have barely moved, at around 3 per cent of GDP. Tapping unearned gains on wealth could be an appealing option for the Government, if it wants to avoid sharp cuts to some public services and maintain commitments not to raise the headline rates of taxes on income. To that end, reforms to Capital Gains Tax and Inheritance Tax could collectively raise almost £10 billion. 

But not everyone has been able to join in on Britain’s wealth boom. Historically low levels of active saving have left many families with small financial buffers. In June, three-in-ten Britons (27 per cent) said their household would be unable to cope with an unexpected bill of £850. Many workers are also failing to save enough in their pensions, despite the success of auto-enrolment during the 2010s. These two problems – of low precautionary savings today and insufficient pensions for the future – require a joined-up solution. For example, a higher default rate for auto-enrolled pension contributions could be coupled with contributions to a liquid ‘sidecar’ savings account, which have been shown to boost precautionary savings for employees. The Government could complement this by expanding Help to Save, an existing scheme that incentivises saving for those on low incomes.

Key findings

Household wealth in Britain now stands at more than six times national income, largely due to passive gains on existing wealth
The new Government faces no shortage of economic challenges. Public services are under severe pressure, while households are still recovering from a cost of living crisis that saw prices rise by 22 per cent in just two years, all against a backdrop of low wage growth and chronic under-saving. The Government will need to think carefully about policy to support household finances. And, on the back of the biggest tax-raising Parliament since the Second World War, it’s time to reconsider the role of wealth taxes in today’s system. On both fronts, it’s critical to understand the nature of household wealth in Britain today and its main drivers over the recent past.

Passive wealth gains haven’t shown up in tax revenues
One might hope that huge passive gains from wealth would have brought with them higher tax revenues. Unfortunately, this hasn’t been the case. 

Many families have insufficient financial buffers and retirement savings
In stark contrast to rising wealth levels, Britain’s rate of saving over the past 30 years has remained stubbornly low.

In the coming Parliament, there is a clear case for policies to increase financial resilience across the income distribution
As things stand, too many families have insufficient financial buffers today and too many workers are facing the prospect of insufficient incomes in retirement. Any approach to tackling these two problems must be joined up, not least because evidence from the rollout of auto-enrolment suggests a tension between contributing to a pension and saving for a rainy day.