Affordability of water and sewerage charges

The results presented in this report are based on UKMOD version B2025.07. UKMOD is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The results and their interpretation are the authors’ sole responsibility.

The authors wish to express their thanks to colleagues at Scottish Government and the Centre for Microsimulation and Policy Analysis, who provided invaluable advice on and support of the underlying modelling that informed this work.

The authors are grateful to staff at Scottish Water and the Scottish Government for helpful discussions during the development of this work.

The views expressed in this report are those of Consumer Scotland alone.

Domestic charges for water and sewerage are expected to increase significantly in real terms in the coming years.

In its Draft Business Plan – which covers the six year Strategic Review of Charges period from 2027-2028 to 2032-2033 – Scottish Water sets out the need for increased investment to address challenges including climate change, demographic shifts, evolving regulatory requirements and replacement of ageing assets.

The required investment will largely be met through increased customer charges. Scottish Water’s Draft Business Plan proposes annual increases in customer charges of CPI+4%, amounting to a cumulative real-terms increase of 26.5% over the six years.

Whilst the actual outlook for bills will not be finalised for several months, these proposed increases follow a cumulative real terms rise in water bills of almost 8% during the past five years – consistent with the Determination of Charges for 2021-2027 – and the prospect of a further real terms increase in the final year of that period.

In this context, it is essential to understand the impact of past and future increases on the affordability of bills. This report examines recent trends in key measures of water poverty and severe water poverty in Scotland, and projects future trends in water poverty under various scenarios for water charging policy.

Trends and outlook for water poverty

The proportion of households in Scotland in water poverty – spending more than 3% of disposable income in water and sewerage charges – fell below 10% in 2023-2024 for the first time. This reflected real terms reductions in water charges during the cost of living period.

The decline in water poverty is anticipated to be relatively short-lived. Water charges increased above inflation in 2024-2025 and 2025-2026 which will take water poverty above the 10% threshold.

By 2029-2030 – halfway through the next SRC period – water poverty is projected to reach 14% if charges increase in real terms by 4% per annum (and in the final year of the current charge period). This is a higher rate of water poverty than has been seen for almost two decades.

By the end of the Strategic Review period, water poverty could reach between 15-16% under a scenario where water charges increase at 4%. The specific rate could be higher or lower than this if charges increase more or less quickly in real terms.

The determinants of water poverty

Water poverty is primarily associated with low income. Virtually all households which are in water poverty are also in low income poverty (i.e. have disposable, equivalised income of below 60% of the median).

Other than income, the characteristics of households in water poverty are relatively diverse. This reflects that low income is experienced by a wide range of households – including those in and out of work, in a variety of housing tenures, and a range of different family types.

Policy options to mitigate the impact of bill increases on affordability

The Water Charges Reduction Scheme (WCRS) currently provides bill reductions of up to 35% for eligible households (those in receipt of Council Tax Reduction). Increasing the WCRS discount to 50% would offset the proposed 4% per annum real increase in bills over the Strategic Review period for the households that receive it.

However, whilst an increase in the WCRS to 50% would partially mitigate the projected rises in water poverty, it would have a relatively modest impact in this regard.

There are several reasons why increasing the WCRS makes a modest impact on water poverty. A relatively low proportion – around one quarter – of households in water poverty currently receive it, reflecting under-claiming and weak targeting (although it is important to add that some households are not in water poverty precisely because they do receive the WCRS).

The modest impacts of increasing the WCRS also results from the assumption in our modelling that the costs of increasing the WCRS to 50% would be ‘socialised’ across other bill-payers. Increasing the WCRS to 50% would add 2 percentage points to bills generally over the six-year charge period (i.e. would see bills increase by 28% in real terms rather than 26%).

The vast majority of the ‘beneficiaries’ of an increase in the WCRS would be households in the lower third of the income distribution. Increasing the WCRS would provide support to a large number of households in income poverty, funded through a relatively progressive increase in charges across other households.

Rather than funding the WCRS through increases in charges more broadly, an increase in WCRS to 50% could be funded through a halving of the Single Person Discount. This policy is slightly more effective at reducing water poverty. But it also results in more significant bill rises for single person households who don’t receive WCRS, including some of those with low incomes. Overall, it is a less progressive reform than funding an increase to WCRS across all billpayers.

Recommendations

Whilst increases in the WCRS cannot fully mitigate the forthcoming rise in water poverty, there is nonetheless a strong case for it to increase to 50%. The households which would benefit from an increase in the WCRS are nearly all households in the lower part of the income distribution, and so are amongst those most likely to be struggling.

Recommendation 1: Consumer Scotland recommends to the Scottish Government that the WCRS is increased to 50% in SR27. The policy would offset the impact of real terms bill increases for over 400,000 households, the vast majority of whom are in the lower part of the income distribution. If the policy could not be funded ‘externally’ (e.g. through an increase in Scottish Water borrowing), then it could be funded by a one-off increase of two percentage points on bills generally.

This policy leaves many households at risk of water poverty who do not qualify for or receive WCRS. There is a case for developing a water hardship fund which could provide support for families with incomes below the thresholds for water poverty and who do not qualify for WCRS.

Recommendation 2: Consumer Scotland recommends the establishment of a water hardship fund. The fund could provide support for families with incomes below the thresholds for water poverty but who do not qualify for WCRS.

In the longer term, policy should move toward a fairer and more targeted charging system. However, given the constraints of the 2027-2033 period, fundamental reform is unlikely to be feasible. Improvements to affordability policy must therefore be pragmatic and workable within the existing system. An enhanced WCRS, supplemented by a ‘by-application’ safety net, represents a practical and impactful approach worthy of serious consideration.

Recommendation 3: During SR27, the Scottish Government and Scottish Water should undertake further work to identify suitable mechanisms to improve the automatic targeting of affordability support in the following charging period.

Water bills for Scotland’s 2.6 million domestic consumers are on the rise. Between 2020-2021 and 2025-2026, charges increased by 7.4% in real terms (i.e. above the underlying rate of CPI inflation). The typical annual bill for a property in band C is now £534 per year, up from £398 in 2020-2021.

It is likely that water bills will increase more rapidly in coming years.

In Scotland, the framework for water charges is set by a series of strategic reviews of charges (SRC), each covering a period of six years. The current review period, known as SR21, spans from 2021-2022 to 2026-2027. During SR21, Scottish Water is permitted to increase water charges by up to a maximum of two percentage points above CPI inflation (CPI+2%) on average for each of the six years of the plan period. In other words, charges are permitted to increase by up to 12.6 percentage points above the rate of inflation during SR27.

Planning is currently underway for the subsequent strategic review period (SR27) which will cover the period from 2027-2028 to 2032-2033. Scottish Water has published a Draft Business Plan setting out its delivery priorities for the SR27 period. The Draft Business Plan sets out a need for Scottish Water to increase its investment to address a number of challenges.[1] These include the impact of the climate crisis, a shifting and changing population, new regulatory requirements and the increasing cost of replacing ageing assets.

The proposed £13.4 billion in expenditure over the SR27 will largely be funded through customer charges. Scottish Water’s Draft Business Plan proposes annual increases of CPI+4%, amounting to a cumulative real-terms increase of 26.5% over the six years.

The final decision on charges for SR27 will depend on the outcome of the consultation and the views of regulator WICS, and will be set out in a Final Determination. The Final Determination could allow charges to increase by more or less than the CPI+4% currently proposed by Scottish Water. However, regardless of the exact figure, bills are on course to increase significantly in the coming years.

In this context, understanding the impact of proposed bill increases on affordability is essential.

This report examines recent trends in water charge affordability in Scotland and projects future affordability under various charge scenarios. It does this by following the same methodology as in Consumer Scotland’s October 2024 report.[2]

Affordability is assessed by examining the proportion of Scottish households who are likely to experience ‘water poverty’, a well-established and recognised affordability measure. The report explores how water poverty rates may change under different charge scenarios, as well as the impact various discounts and reductions that are available to eligible customers.

This report is one of many pieces of research that is being undertaken by Consumer Scotland, Scottish Water, and others that will collectively inform decisions on SR27 charging parameters. While much of the broader research asks consumers directly about their views on the reasonableness of charges or the perceived impact on affordability, this report uses forecasting techniques to quantify the likely impact of different charge scenarios on the rate of water poverty.

Water charging policy

Domestic water bills in Scotland are primarily determined by council tax band, and very few domestic properties are metered. In 2025-2026, the combined annual bill for water and sewerage charges ranges from: £400 for a band A property, £600 for band D, and up to £1,200 for a band H property.[3] [4]

Whilst water and sewerage charges are primarily determined by council tax band, there are several reductions, discounts and exemptions available:

Single Person Discount (SPD): Households with only one adult (aged 18 or over), or where other adults are ‘disregarded’ for council tax purposes (such as students, apprentices or have severe mental impairments), receive a 25% discount on their council tax bill.[5] [6]

• Water Charges Reduction Scheme (WCRS): Households that receive Council Tax Reduction (CTR) also receive a discount on their water bill through the WCRS. The WCRS reduction amount is calculated as 35% of their CTR rate. For example, a household receiving a 100% CTR would get the full 35% reduction on their water bill; and a household receiving a 50% CTR would get a 17.5% reduction. The total water bill reduction – combining both the SPD and WCRS – is capped at 35%. For example, a single-person household receiving full CTR would get a 25% discount through SPD and an additional ten percentage points reduction via the WCRS, bringing the total reduction to the 35% maximum
• Disability relief: Households with disabled occupants can apply for a reduction if their home is adapted for disability. Eligible households are charged based on the council tax band below their actual band
• Exemptions: Some households are fully exempt from council tax, and therefore water charges. This includes households where all occupiers are full-time students, those hospitalised long-term, or those with severe mental impairments

The rationale for basing charges on council tax band, with discounts for single person households, is implicitly linked to both consumption of water services and to income. On average, higher banded properties are likely to: consume higher volumes of water and wastewater services; and have higher income. Thus, basing charges on council tax band is justified by two senses of fairness – one that links charges to consumption and one that links charges to ability to pay.

However, there are limitations to this charging method. Council tax band is loosely correlated with income and water consumption, but there is a huge degree of variation within and between council tax bands.

Another reason for linking water charges to council tax band is administrative; local authorities collect water charges on Scottish Water’s behalf, alongside council tax. This approach has been in place since Scottish Water’s establishment in 2002. The only significant structural change was the introduction of the WCRS in 2006, which initially provided bill reductions of up to 25% for CTR recipients.

In 2021, the maximum WCRS discount was increased to 35%. The rationale for this was to protect low-income households from the above-inflation bill increases that were permitted during the SR21 period. This increase helped offset the impact of price rises for recipient households. Specifically, the increase in WCRS to 35% means that recipient households would not see any real terms rise in their bills over the six-year period.

The value of reductions, exemptions and discounts

Table 2.1 summarises the value of these various discounts, reductions and exemptions. In 2023-2024, the total value of water bill reductions, exemptions, and relief, was £205 million. Of this:

• Discounts (mostly for SPD) accounted for £124 million
• WCRS provided £27 million of support to 491,000 households
• Disability relief was received by around 15,000 dwellings, with a total value of £1 million
• Exemptions (for properties that are occupied but where nobody is liable for the charge) was £70 million

The value of the WCRS may appear relatively small because, for households receiving both SPD and WCRS, most of the reduction is counted under SPD. For example, a household who is eligible for a 25% single person status discount and full WCRS at 35%, the majority of that household’s bill reduction (25/35) is accounted for as status discount.

This chapter examines how the rate of water poverty has evolved during the past 25 years. It goes on to consider the outlook for water poverty during the next Strategic Review period.

Recent changes in water charges

Chart 3.1 shows the evolution of the water charge in real terms since 2002-2003, when Scottish Water was established.

Following the 2008 recession, water charges were frozen in cash terms for four years, resulting in a real-terms decline. For the next ten years (from 2012-2013 to 2021-2022), water charges remained broadly stable in real terms.

In 2022-2023, the water charge declined significantly in real terms. This was partly due to the method used to uprate charges; increases are based on the annual CPI inflation rate from the previous October. While CPI for 2022-2023 was close to 10%, the relevant October 2021 figure was just over 4% — leading to a below-inflation increase and a real-terms decline.

This below-inflation increase was offset by significantly above-inflation increases in 2024-2025 and 2025-2026, which returned the real-terms charge back to its 2010 level. The charge for the final year of the plan period, 2026-2027, will be announced in early 2026. Notably, there is scope for a further real terms increase within the parameters of the current changing period as explained in the following section.

Changes in water charges in SR21 (2021-2027)

During SR21, Scottish Water is permitted to increase water charges by up to a maximum of two percentage points above CPI inflation (CPI+2%) on average for each of the six years of the plan period.

For any given financial year, the relevant CPI figure is from the previous October. For example, the 2021-2022 charge was based on CPI from October 2020.

Table 3.1 summarises the CPI metric, annual charge increase, and cumulative change for the first five years of SR21. While the charge increased by CPI+1.8% in 2021-2022, it increased in line with inflation in 2022-2023 and significantly below inflation in 2023-2024. In 2024-2025 and 2025-2026 the charge increased well above CPI+2%.

Overall, charges have increased by 7.4% above inflation over the first five years of SR21. Given the cumulative cap of 12.6% above inflation (1.026), this suggests scope for an increase of up to CPI+5% in 2026-2027, the final year of the plan period.

This chapter considers how water poverty rates vary by household characteristic. For this analysis, we pool three years of HBAI data (2021-2022 to 2023-2024) to maximise the sample size. Household income is the strongest predictor of water poverty.

Low income

The key point to note is that water poverty is primarily associated with low income (i.e. have disposable, equivalised income of below 60% of the median).

Specifically, of the households in water poverty, nearly all (around 9 in 10) are in low income poverty. Only 30,000 households (12% of households in water poverty) are not also in income poverty. All households in severe water poverty are in low income poverty.

We can also see the importance of income when looking in more granular levels. For example:

• The majority (68.7%) of households in the lowest decile of income (i.e. the bottom 10%) are in water poverty.
• This falls to 21.1% of households in the second decile, and 7.1% in the third.
• No households in the top half of the income distribution are in water poverty (as shown in Chart 4.1).

Similarly, being in severe water poverty (i.e. spending more than 5% of disposable income on water and sewerage charges) is uniquely a feature of low-income households:

• Almost half (43.5%) of households in the lowest income decile are in severe water poverty – equivalent to 327,000 households.
• Only 3.0% of households in the second decile are in severe water poverty.
• None of the households in higher income deciles are in severe water poverty.

Other characteristics

Other than income, the characteristics of households in water poverty are relatively diverse. This reflects that low income is experienced by a wide range of households – including those in and out of work, in a variety of housing tenures, and a range of different family types.

This can be observed in Chart 4.1. This shows, for example:

• Council tax band: Water poverty rates are higher in council tax bands E, F and G than in bands A-D. This reflects wide variation in household income within each band, and that charges are systematically higher in higher banded properties.
• Family type: Water poverty rates are highest amongst single working-age adult households (13.2%) and lowest amongst single parent households (7.2%) and pensioner households. But the important point to note is that, whilst these differences are statistically significant, they are not substantively very different across groups – water poverty is fairly ubiquitous across household composition.
• Housing tenure: Water poverty rates are higher in private rented (12.9%) and social rented (11.9%) households than those who own with a mortgage (6.6%) or owned outright (10.5%).
• Economic status: Households where nobody is in work are more likely to be in water poverty than those where at least one person is in work.

This chapter examines the impact of changes to the structure of water charges on water poverty. It considers the impact of increases to the WCRS, including the impacts of increased charges across other billpayers to fund these increases. It compares the impact of funding a WCRS from increased charges for all billpayers, with the policy to fund an increase in WCRS through reductions in the Single Person Discount. Whilst an increase in WCRS is only partially effective in mitigating projected increases in water poverty, the majority of benefit is nonetheless experienced by households in the bottom third of the income distribution.

The impact of varying the Water Charges Reduction Scheme (WCRS)

We estimate that around 426,000 households in Scotland currently receive the Water Charges Reduction Scheme (WCRS). Since 2021-2022 the scheme provides eligible households with up to a 35% discount on their water bills, having increased from a maximum 25% discount provided in the previous charging period.

Table 5.1 summarises the impact of changing the WCRS discount level on rates of water poverty.

For context, the table also shows the impact of removing the WCRS entirely. Without the scheme, an estimated 11.4% of households in Scotland would be in water poverty – 1.4 percentage points higher than under the current 35% discount. This implies that the existing WCRS helps approximately 36,000 households avoid water poverty.

One way to reduce water poverty is to increase the WCRS level beyond 35%. However, this would require higher gross water charges to fund the additional support, so it is important to consider the benefits and costs to consumers. Our analysis suggests that increasing the WCRS from 35% to 50% would cost £24 million per annum. This is equivalent to an increase on bills of two percentage points. Increasing it to 100% would cost a further £82 million per annum. These increased costs are assumed to be funded by higher charges for all customers.

In the analysis that follows, the costs of increasing the WCRS are ‘fully funded’ by reallocating them across all bills.

Increasing the WCRS to 50% would reduce water poverty by around 0.7 percentage points, equivalent to 17,000 fewer households in water poverty (Chart 5.1). A 100% discount would result in a similar reduction – 0.6 percentage points or 16,000 fewer households compared to the current 35% level. Under the 100% scenario, the number of people in water poverty is slightly higher than in the 50% scenario due to the increased gross water charges required to fund the increased discount.[14]

Increasing the WCRS from 25% to 35% brought an additional 223,000 households into the scheme, despite no change in eligibility criteria. This is because under the 25% WCRS, single person households (who already received a 25% bill reduction) did not benefit from further reductions. Once the WCRS increased to 35%, these households received an additional 10 percentage points reduction.[15]

Further increases beyond 35% do not materially change the number of recipient households, but they do increase the average amount of support received per recipient household. [16] If the WCRS were increased to 50% or 100%, the average annual bill support per recipient households would increase to £135 and £336 respectively.

We modelled a range of increased WCRS levels, in 5 percentage point increments from 35% to 100%. The 65% WCRS scenario resulted in the lowest water poverty rates – 9.2%, equivalent to around 239,000 households. This is lower than the 35% scenario, in which 10.1% of households were in water poverty, and only slightly lower than the 50% and 100% scenarios (both 9.4%).

It is worth noting that an increase in the WCRS from 35% to 50% would be sufficient to offset the real-terms rises in the water bills for those households who receive it, under a scenario where water charges increase by 4% annually in real terms. In other words, under a scenario where water charges increase at CPI+4% and the WCRS increases to 50%, WCRS recipients will face a bill that is slightly lower in real terms at the end of SR27 than at the start. However, if bills were to increase annually by 5%, an increase in WCRS to 50% would not quite offset the real increases in bills for recipients.

The outlook for water affordability

Water and sewerage charges in Scotland are set to increase significantly above inflation during the SR27 period (2027-2028 to 2032-2033). Whilst the specific outlook for bill increases is still to be determined, bill increases will almost certainly outstrip the growth of household incomes. Water bills will there inevitably increase as a percentage of income for all households.

In assessing the impact of these bill increases on the affordability of bills, it makes sense to focus on the households which are likely to face the biggest affordability challenges as a result of these increases – i.e., the households for whom water charges represent the largest proportion of household income.

This report has examined the affordability of water and sewerage charges using a well-established measure of water poverty, based on the proportion of households’ disposable income spent on water and sewerage.

The analysis reveals that rates of water poverty in Scotland are on course to increase over the SR27 period. The extent of these increases will depend on both the level of increase in charges, and the real growth in household income.

If bills were to increase by four percentage points above inflation each year, it is likely that water poverty rates would, within the first three years of the SR27 period, have reached levels not seen in Scotland for 20 years.

The impacts of policy change

Increasing the WCRS to 50%, from its current 35%, would offset the real terms impact on bills for the households that receive it. The WCRS recipient households are not all in water poverty, but are almost entirely in the lower third of the income distribution.

The policy would have limited impacts in offsetting the rise in water poverty. This is mainly because of limited coverage of the WCRS amongst households in water poverty – itself reflecting less than full take-up, and less than perfect targeting. But it is also because of the assumption that increases in the WCRS would need to be funded through increases in bills elsewhere in the domestic system. An increase in the WCRS to 50% would around around two percentage points to bills (in the context of a proposed real terms increase of over 26% over the six year period of the next Strategic Review period).

An increase in the WCRS from 35% to 50% would reduce water poverty by 0.7 percentage points, equivalent to about 18,000 households, if it were funded by an increase in bills generally. It would reduce water poverty by two percentage points, equivalent to over 50,000 households, if funded ‘externally’ (i.e. without cross subsidisation amongst consumer bills).

The imperfection of the targeting mechanism is not unique to the water market. Similar (if not quite as pronounced) issues occur when trying to provide financial support to households in child poverty, or to households in fuel poverty.

Recommendations

Whilst increases in the WCRS cannot mitigate the forthcoming rise in water poverty, there is nonetheless a strong case for it to increase to 50%. This level of increase would protect recipient households from real terms bill rises during the next Strategic Review period. And whilst the recipients of WCRS are not all households in water poverty, nearly all recipient households in the lower part of the income distribution, and so are amongst those most likely to be struggling.

Recommendation 1: Consumer Scotland recommends to the Scottish Government that the WCRS is increased to 50% in SR27. The policy would offset the impact of real terms bill increases for over 400,000 households, most of whom are in the lower part of the income distribution.

But this policy leaves many households at risk of water poverty who do not qualify for or receive WCRS. There is a case for developing a water hardship fund which could provide support for families with incomes below the thresholds for water poverty and who do not qualify for WCRS.

Recommendation 2: Consumer Scotland recommends the establishment of a water hardship fund. The fund could provide support for families with incomes below the thresholds for water poverty but who do not qualify for WCRS. There might be different models for distributing this, which could include by referral through organisations such as Citizens Advice Bureau or Advice Direct Scotland

Actions beyond SR27

In the longer term, policy should move toward a fairer and more targeted charging system. However, given the constraints of the 2027-2033 period, fundamental reform is unlikely to be feasible. Improvements to affordability policy must therefore be pragmatic and workable within the existing system. An enhanced WCRS, supplemented by a ‘by-application’ safety net, represents a practical and impactful approach worthy of serious consideration.

Recommendation 3: During SR27, the Scottish Government and Scottish Water should undertake further work to identify suitable mechanisms to improve the automatic targeting of affordability support in the following charging period. A new scheme of affordability support, that more effectively targets water poverty, should be introduced by the start of the 2033 regulatory period.