Quarter of UK workers suffered unexpected income droughts in last year thanks to rise of zero-hours contracts, charity warns

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More than a quarter of UK adults faced an unexpected or 'shock' fall in income in the past year despite the economic recovery, a report claims.

Nearly one in 10 faced multiple drops in income or changes in circumstances that threatened to send them into problem debt, charity StepChange warned. It added that 2.6million adult Britons are struggling with severe problem debt or about 5.2 per cent of the population.

The StepChange report said structural changes in the labour market, like the growth of zero-hours contracts and other insecure working arrangements, were behind the increased frequency of 'income shocks' - caused by job loss, reduced working hours or a relationship breakdown.

More than a quarter of UK adults faced an unexpected fall in income in the past 12 months.

Now, almost 750,000 people work a zero hours job while 1.26 million are in part-time jobs and 586,000 are in temporary roles. Those with these types of 'insecure' contracts are twice as likely to experience income shock.

Of those with a zero-hours contract, 67 per cent experienced a loss of income in the past year and this figure drops to 59 per cent for those on a fixed-term contract and 53 per cent for the self employed.

In comparison, this was only 33 per cent for those with a permanent employment contract.

Those described as having 'severe problem debt' showed three or more of the following signs, while those with 'problem debt' showed one or two; only making minimum debt repayments for three months or more, falling behind on essential bills, taking out new loans to meet repayments for existing ones, using credit cards to last until payday and regularly being hit with overdraft or late repayment fees. 

One of the main causes of unexpected income drops is the rising number of people who are now in 'insecure' forms of work, such as those with zero hours contracts

The best way to avoid an income shock, and falling into problem debt, is to have an emergency savings pot.

But the rising number of people now in temporary or zero hours contracts and years of below inflation wage rises mean people are now less likely to have an pot to fall back on.

Many of those using credit cards and/or benefits to cope with an income loss then fall into serious problem debt

On top of this, the charity says real-term wages are still only at 2005 levels so households have very little spare income to protect themselves, as the table above shows.

Instead, many people rely on credit or overdrafts as a coping strategy when they have a drop in income.

Many of those in severe debt rely on credit cards as a coping strategy when they have a drop in income.

But those who used credit to cope with paying for essential costs were twenty times more likely to end up in problem debt than those who relied on other sources, such as benefits or family loans. 

Mike O’Connor, Chief Executive of StepChange, says: 'We need mechanisms and safety nets that will ensure that a drop in income doesn’t precipitate a rapid fall into problem debt,'

'People, especially those on low incomes, need more help to build precautionary savings.' 

'Our welfare system should respond to people’s needs and help them cope with short-term ups and downs so that a temporary change in circumstance does not become a serious and entrenched financial problem,' he adds. 

Despite it being called an 'income shock' the charity suggests it's the 'new normal' for households to experience regular drops in income.

'People have always faced ups and down in their incomes, but the changing nature of work means that income shocks are now a regular feature of more people’s lives.'

'These changes may be here to stay and social policies need to reflect the new normal. Our social policy is not keeping up with our economic policy,' O'Connor adds.

The charity used YouGov to survey 4,771 people across the UK in August 2015, asking them about their financial situation in the past 12 months.