Interactive Investor

Income inequality ticks higher in the UK

18th July 2023 11:56

by Myron Jobson from interactive investor

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ONS data on the effects of taxes and benefits on UK households lays bare the widening chasm separating the haves from the have-nots.

The Office for National Statistics has today published data exploring the effects of taxes and benefits on UK household income for the financial year ending 2022.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Income inequality in the UK bears grave consequences that extend far beyond mere numbers on a spreadsheet. The widening of the chasm separating the haves from the have-nots, perpetuates unequal access to crucial resources, opportunities, and services such as education, healthcare and housing.

“Whichever way you cut it, whether or not you factor in taxes and benefits, income inequality ticked higher in the 2021-22 tax year compared to the previous year. But while income inequality before taxes and benefits rose by 1.6 percentage points to 50.2%, the ‘final’ income inequality (after taxes and benefits) increased by 0.6 percentage point to 29.9%. This illustrates how system of taxes and benefits can work in tandem to level the playing field, but clearly more needs to be done to stimulate a contraction in the income gap.

“Taxes, when designed in a progressive manner, ensure that those with higher incomes contribute a larger proportion of their earnings to the public coffers. This approach allows for a more equitable distribution of the tax burden. Meanwhile, social safety nets, welfare programmes and direct financial assistance provide a vital lifeline for those grappling with financial hardship. These initiatives aim to ensure a basic standard of living, access to healthcare, education, and other essential services. By bolstering the income of lower-income households, these benefits help bridge the gap and offer a pathway towards greater economic equality.

“Income inequality continues to be exacerbated by indirect taxes such as VAT, which by their very nature, possess a regressive quality. Unlike their progressive counterparts, which extract a bigger share from high-income earners, these levies are applied to all individuals, irrespective of their income bracket. It is a uniform burden that fits differently, depending on the size of you pay packet. Those on lower incomes, who spend a larger portion of their earnings on basic essentials - the likes of food, shelter and utilities - find themselves disproportionately affected by indirect taxes. Their hard-earned income is siphoned away at a more significant rate than that of their wealthier counterparts.”

Key points

  • The richest fifth of people's average household income before taxes and benefits (£117,500) was 14 times larger than the poorest fifth (£8,200); however, this gap reduced to four times larger (£83,900 and £22,300, respectively) after taxes and benefits.
  • Original income inequality (before taxes and benefits) increased by 1.6 percentage points to 50.2% between FYE 2021 and FYE 2022, while final income inequality (after taxes and benefits) increased by only 0.6 percentage points to 29.9%, highlighting the redistributive effect of taxes and benefits.
  • Indirect taxes increased income inequality by 3.5 percentage points; the poorest fifth of people paid a greater proportion of equivalised disposable income on indirect taxes at 28.3%, compared with 9.0% for the richest fifth of people in FYE 2022.
  • Median household income in the UK before taxes and benefits was £35,000 in the financial year ending (FYE) 2022, increasing to £38,100 after taxes and benefits.

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