U.K. households are seeing the squeeze on their finances ease, with Britons feeling the most optimistic in five years, a new survey shows.
The Markit Household Finance Index, which tracks sentiment towards household finances, showed current perceptions of household finance rose to 42.1 in February from 41.7 in January, the highest reading since February 2009. While still below the 50-point mark that signals optimism, the data shows negative sentiment is waning.
Households are feeling the positive effects of slower inflationary pressures, in addition to a slight uptick in income and stabilizing household debt levels, Markit's survey said.
"The tide has started to turn for U.K. household finances, as falling inflation and improvements in labor market conditions helped reduce the squeeze on budgets to the lowest for at least five years in February," Tim Moore, senior economist at Markit said in a statement.
Inflation has been above the Bank of England's 2 percent inflation target since December 2009, eating away and consumer spending power, at a time when real wages were not keeping up.
But the latest data showed inflation in the U.K. fell to 1.9 percent in January, dropping below the Bank of England's 2 percent target for the first time in over four years.
Markit's index reflects the improving British economy, which saw 1.9 percent growth in 2013 and is predicted to grow 2.4 percent this year. Consumer spending has played a big part in the recovery.
(Read more: UK economy records fastest growth in 6 years)
Households are also upbeat on the year ahead, with Markit's index showing financial wellbeing for the next 12 months in positive territory for the first time since 2009 at 50.7 in February, rising from 46.1 the month before.
"Adding to hopes that household finances are on the cusp of a rebound, the latest data finally pointed to positive expectations for financial wellbeing over the year ahead and households noted the most subdued outlook for living costs since early 2010," Moore added.
The survey showed households saw no change in their employment income, but the index measuring savings rose to its highest level since February 2009, and household savings rose too.
—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal