Four years ago, Kerry Hudson had just won a prestigious French literary prize when one late payment left her unable to make the rent on her sublet flat in Whitechapel. Could she continue as a writer? Or would she have to return to her old job in the charity sector?

Louise Candlish had 11 novels under her belt when, a couple of years ago, she found herself considering quitting. “Some of them had really flopped,” she says. “I had got myself into that catch-22, where your sales figures aren’t as healthy as they once were or as good as retailers would like. So then your book comes out and it’s not stocked in as many places, so it doesn’t sell as well. Then you’re writing your next one and it won’t earn as much money, as they’re looking at what happened to the one before. You’re almost doomed to continue the pattern.”

With Wednesday being Dalloway Day – marking the mid-June setting of Virginia Woolf’s Mrs Dalloway – a report from the Royal Society of Literature (RSL) has revealed that only 5% of writers earn the income Woolf once argued a writer needs to work. This was £500 a year in her day, now equivalent to just over £30,000. But some 184,000 books are published every year in the UK and the vast majority of the authors behind them fall into what is called the “midlist” – books that get little to no marketing budget but publishers deem good enough to put out, in the hope that some of them might hit the charts. Most of them won’t.

Candlish planned to stop after two novels received scant backing from her publisher. “Meanwhile, debuts were getting these huge budgets, posters everywhere for books I thought were no better than my own, and I thought, well, this is ridiculous,” she says.

Despite having just won France’s Prix Femina, Hudson had to apply for a Royal Literary Fund hardship grant to help her until next payment. “Coming from a working-class background, I don’t have a credit card, I don’t have family I can borrow from – there’s no safety net,” she says.

Today, Hudson’s memoir Lowborn, about growing up in poverty, is just out to positive reviews and healthy sales. Candlish moved to a new publisher for her 12th novel, Our House, which has been a bestseller and won the best thriller prize at the British book awards. Her 13th, Those People, is published in paperback this month. Neither writer is considering giving up.

“It’s just so hard for a midlist, mid-career author to break the cycle. So much of the pot is given to the hyped debuts and the established household names. So I made a concerted effort,” says Candlish, who has seen her advance double to six figures, because of the success of Our House. “You really are as good as your last sales figures. I’ve often been in situations where I’ve literally been scrabbling around for coins at the back of the sofa the week before getting some good news. It’s gone quite close to the wire sometimes but I’ve managed to keep going.”

This week, the All-Party Parliamentary Writers Group called on the UK government to take immediate action to reverse the steep decline in author incomes, a year after its inquiry found that writers’ earnings have fallen by 42% in real terms since 2005.

The tough conditions could discourage new writers, “exacerbating the lack of diversity in publishing and the creative industries”, the APPWG report warned – a concern echoed by Hudson and the RSL’s survey, which found that of 2,000-odd writers, 25% identified as working class, but only made up 11% of the highest earners.

“It excludes so many people on the other end of the spectrum,” says Hudson. “We’ll miss all those stories if we only have books by people who either have the freedom to devote all their time and attention to that, or who have other sources of income. All the people who need to pay the rent and the bills, they’re the ones who will miss out. It will make our literary culture so much poorer because we will have such a narrow spectrum of stories.”