WATER bills are set to be around £30 higher in 2020 - despite water companies being told to cut annual bills by five per cent over the next five years.

The ruling by industry regulator Ofwat means average annual charges for water and sewerage services for England and Wales will see a real-terms fall from £396 to £376 in current prices.

But actual bills dropping through customers' letterboxes in five years' time will be higher, because they will add in the rate of Retail Price Index (RPI) inflation.

This currently stands at 2.3 per cent, higher than the benchmark Consumer Price Index (CPI) measure and well above pay growth at one per cent - fuelling fears that, despite being held back, water bill rises could still see customers struggling to pay.

Northumbrian Water was told to cut its bills by one per cent over the next five years - the smallest percentage cut of any supplier.

This means average bills will fall from £388 to £382 before inflation, according to Ofwat.

However, with inflation added customers will be paying an extra £42 by 2020, according to experts.

The company said it would invest £880 million over that period to improve supplies and tackle flooding.

Heidi Mottram, Northumbrian Water’s chief executive officer, said: “While we appreciate that any increases in the household budget are unwelcome our customers will receive bills that rise, on average, by less than inflation.

“The final determination appears to balance a good deal for customers with a tough challenge for the company."

Yorkshire Water was told to cut its bills by three per cent by 2020, meaning its average bills will fall from £373 per year to £361, although after inflation this figure would increase by £33.

Yorkshire Water chief executive Richard Flint said the company would invest more than £3.8 billion in the region’s water and sewerage services over the five years.

He added that the money would drive significant improvements in customer service, as well as delivering major environmental benefits across the region.

“This is great news for our customers who already benefit from having some of the lowest bills in the UK,” he said.

Nationally, Ofwat's 5 per cent real-terms cut means water companies are having to hold back bill rises by more than they had initially wanted, after their initial submissions a year ago which would have seen a 2 per cent real-terms fall.

The watchdog also said utility firms must spend £44 billion on improvements, including tackling water leakage, supply interruptions, and sewerage water flooding of properties and cleaning up water at beaches.

Ofwat chief executive Cathryn Ross said: "With bills held down by 5% and service driven up over the next five years, customers will get more and pay less."

But shares in some water firms rose as the decision ended uncertainty. Investec analyst Roshan Patel said the final determination by Ofwat gave a "balanced outcome" for shareholders.