From Pandemic to Cost-of-Living Crisis: The Distributional Impact of UK Tax and Benefit Policies, 2019–2023

Matteo Richiardi, Justin van de Ven and Daria Popova

No CEMPA1/26, Centre for Microsimulation and Policy Analysis Working Paper Series from Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research

Abstract: This paper analyses how UK tax-benefit policies shaped poverty, inequality, and living standards between 2019 and 2023, spanning the COVID-19 shock and the subsequent cost-of-living crisis. Using the UKMOD tax-benefit microsimulation model combined with imputed household consumption data, we assess distributional outcomes for both disposable and consumable income, the latter accounting for indirect taxes. We apply fiscal incidence and decomposition techniques to distinguish the effects of changes in market incomes and population characteristics from discretionary policy choices. We find that market income inequality and poverty increased over the period, but the UK tax-benefit system became more redistributive. Disposable income inequality declined and the poverty-reducing impact of taxes and transfers strengthened during and after the pandemic. Regressive indirect taxes, however, weaken the gains achieved through direct redistribution, particularly for low-income households. Decomposition results show that real consumable incomes rose for the bottom three deciles, despite falling market incomes, due to uprated means-tested benefits and targeted cost-of-living payments. In contrast, middle- and higher-income households experienced sizeable real losses, driven mainly by policy effects rather than labour market developments. Frozen income tax thresholds generated substantial fiscal drag, reduced the progressivity of personal income tax, and accounted for most income losses outside the bottom of the distribution. Overall, policy changes over 2019 to 2023 protected low-income households in relative terms while reducing real living standards across much of the rest of the distribution through implicit fiscal consolidation.

Date: 2026-01-18
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