The poverty premium affects around 14 million people in the UK, and around a quarter of all Londoners. In this blog, we explain what the poverty premium is, why it exists, and how to end it.
In this blog:
What is the poverty premium?
People on low incomes often have to pay more for essential goods and services than those who are better off. This is known as the poverty premium – the extra costs of being poor.
This often happens because of the way people on low incomes pay for goods and services. For example, a household with a higher income might pay a one-off upfront fee, while a household on a lower income might not be able to afford this and pay smaller monthly bills. This can end up costing more overall.
The poverty premium comes in many forms and applies to many industries, including energy, credit and insurance – essentials that we all need. On average, it costs low-income households £444 a year. For some it can cost thousands.
Specific examples of the poverty premium include:
- Direct debits are often the cheapest way to pay for bills. But households with lower incomes are less likely to pay bills by direct debit, for example because they want to keep more track of spending through individual quarterly bills, which ends up costing more overall.
- People in less affluent areas are hit by a ‘postcode penalty’ and have to pay more for some types of insurance. Car insurance can sometimes up to £384 a year more in deprived areas.
- People in poverty often pay higher interest rates when borrowing money.
- People in insecure work have to pay more for transport and childcare costs because they find out about their shifts on shorter notice.
These are just a few examples. The poverty premium affects millions of people across many industries. Ending the poverty premium would make a huge difference to the lives of those on low incomes and put millions of pounds back into communities.
Who is affected by the poverty premium?
Across the UK the poverty premium affects around 14 million people. In London, it affects around a quarter of households, costing Londoners on the lowest incomes a combined £368 million a year.
In some parts of London, like Hackney South and Shoreditch, the figure is much higher – around 35% of households. You can see how the poverty premium affects different parts of the UK using Fair by Design’s map.
But the poverty premium doesn’t affect everyone equally. Some groups are more likely to face a poverty premium than others.
For example, research from Bristol University found that Black and minoritised households and Disabled households are less likely to pay energy bills by direct debit, which ends up costing more overall.
Why does the poverty premium exist?
The poverty premium exists because of a range of factors. But simply, it’s there because services have been designed without people on low incomes in mind. Some of the factors that contribute to the poverty premium include:
Many industries are based around providing consumers with choice. But low-income households are often locked out of the best, most affordable deals. For example, services will often offer cheaper rates overall in return for an upfront cost. Many low-income households are unable to afford this and opt to pay monthly instead, leading to higher costs overall.
Policymakers and regulators are often disconnected from the lived experience of people in poverty. There’s often a lack of understanding of the needs of people on low-incomes who are not in the room, and businesses often have unrealistic expectations about how people act.
There’s a lack of joined up approach between regulators and government departments – and no clear responsibilities. This means that historically, government and regulators have both neglected to take responsibility for tackling the poverty premium. Campaigners can be passed between government departments and regulators, with no one acting.
In some industries, such as insurance, businesses will offer better rates to consumers they consider ‘low-risk’. Families in poverty are more likely to live in deprived areas which have, for example, higher rates of recorded crime and road traffic accidents. This means that car insurance and house insurance can be more expensive.
For more information on why the poverty premium exists, read the chapter 'Why markets, regulators and the government fail’ in the Fabian Society’s report ‘Cost Cutters: A Plan to Tackle the Poverty Premium and Make Markets Work’.
The lived experience of the poverty premium
To tackle the poverty premium, it’s vital that the lived experience of people in poverty is brought to and understood by businesses and regulators. Fair By Design brings together stories from the voices of those who experience the poverty premium. Watch Catherine’s story below to learn more about how the poverty premium impacts people’s lives.
How can we end the poverty premium?
We believe that people on low incomes shouldn’t have to pay more for the things that we all need. Ending the poverty premium would make a tangible difference to the lives of millions of people in London and across the UK.
To end the poverty premium, businesses will need to act differently toward low-income consumers. The changes and approaches needed will differ across industries, because the poverty premium affects so many. But across the board, we’ll need to better understand and demonstrate to businesses, regulators and government how different groups are impacted by the poverty premium.
We’ll also need to invest in alternative business models that help to make the market fairer. But a lot of business models that aim to tackle the poverty premium face regulation barriers.
Community energy projects, for example, could help to tackle the poverty premium – but regulations mean that currently, even when community energy is local generated, it can’t be distributed in a way that reduces people’s costs.
For a list of policy asks across sectors to tackle the poverty premium, read Fair By Design’s manifesto here.
Funding to end the poverty premium
We already provide funding to Fair By Design who campaign to end the poverty premium, including working with regulators.
Now, we want to fund work that has the potential to make a difference at scale to low-income households across London. We specifically want to fund work that:
- Ends business practices that charge low-income customers more than those who are better off
- Supports alternative business models to grow
- Exposes the unfairness of the poverty premium and the impact on people in poverty
- Offers solutions to the poverty premium designed and driven by people’s experience of poverty, through an intersectional lens
If this sounds like something your organisation might be interested in, find out more about what we want to fund here.