Thames Water has pledged to reduce household bill increases next year by £40 million after admitting it “let down” its customers.

Britain’s biggest water company, which has five million customers, said it was unlikely to meet its target for leaks once again this financial year and promised to return a pot of £40 million built up from fines since 2015 to households.

It said the move will effectively halve the expected annual rise in the tariff next year, meaning bills will be £8 on average less than they otherwise would have been.

Outgoing chairman Sir Peter Mason said: “Our leakage performance over the last year has let down our customers and stakeholders and we’re working hard to improve our performance.”

It comes as the group posted half-year results showing underlying earnings slumped 6.7 per cent to £281.5 million.

Thames Water – which serves a quarter of the UK population – said it will also scrap dividend payments this year to its owners, which includes Canadian and UK pension funds, as well as the sovereign wealth funds of China, Abu Dhabi and Kuwait.

The moves comes after a tough 2017 for the group after it was fined a record £20 million in March for allowing 1.4 billion litres of raw sewage into the River Thames between 2012 to 2014. It was then hit with an £8.6 million regulatory penalty for missed leak targets in 2016-17, while it was also under pressure over excessive pay for top bosses.

The group last week announced that Ian Marchant - the former chief executive of energy giant SSE - is being brought in as chairman to clean up its corporate governance failings.

He will replace long-serving chairman Sir Peter in January.

The announcement completes a changeover at the top, with Steve Robertson taking on the top job in September last year and 60 per cent of the executive team being newly appointed since then.

Thames Water’s decision to return £40 million of penalties built up since 2015 to customers sees it bring forward the payment, which water companies must do every five years.

Thames Water said in its interim results that its expected failure to meet leakage targets this year came after major incidents including a burst pipe in Bromley, south-east London, which left many of its customers without water during the July heatwave.

It is working to get its leaks back within target by 2020 and vowed to keep “investing heavily” to improve its service to households.