Chronic illness also has an impact on others living in the same household, as their annual earnings fall by around £1,200 on average, the report found.
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Carsten Jung, IPPR senior economist, said poor health affects personal finances and career prospects.
Speaking to HR magazine, he said: “About half of exits from employment are related to poor health. And those who stay in work often work fewer hours.
“Almost a third of people report that poor mental health impacts how much they achieve at work. For those with a mental health condition, virtually all say it impacts their work negatively.”
The report found the onset of a mental illness has led to an average annual earnings fall of around £1,700 since 2020.
Jung highlighted a gender disparity in the report, which found better health would improve the incomes of all women as a group at twice the rate of men.
He said: “Women in the UK have higher rates of chronic illness and poorer mental health than men.
“For example, they have a nine-percentage point higher chance of poor mental health than men, with more than every fourth woman suffering from it.
“Improving national health would disproportionately benefit women and their economic prospects alongside it.”
Almost one in three people suffer from chronic illness, and long-term illness costs the UK economy £43 billion per year.
Ara Darzi, co-director of the Institute of Global Health Innovation at Imperial College London, said the UK government cannot afford to wait to take preventative action.
He said: "Policymakers risk focusing too much on the costs of tackling chronic health problems and too little on the economic, social and individual benefits of greater investment in the nation’s health.
"There is much more that could be done with new, early interventions to pre-empt disease before it damages lives.”
The news comes as new figures from the ONS show a 24% increase in days lost to sickness absence across the UK in 2022.
In total, the UK lost 185.6 million working days to sickness absence last year, the highest number since records began in 1995.
Paula Coffey, director of claims, rehab and medical services, at employee benefits provider Unum said the government needs to reform the Statutory Sick Pay system to stop this affecting workers finances.
Speaking to HR magazine, she said: “The current Statutory Sick Pay (SSP) system only begins paying a benefit from the fourth day of absence.
“That’s why Unum has recently called on the government to introduce SSP reforms, with a focus on payments from the first day of sickness absence.”
Jung also said employers also have a role to play in mitigating the financial effects of illness.
“Employers can support employees through working conditions that are better geared to people with illnesses.
“These include for example, flexible working and improved autonomy, employment support services, as well Individual Placement and Support schemes for people with mental health issues.”
