3. Summary of results for all households

The overall impact of taxes and benefits are that they lead to income being shared more equally between households. In 2011/12, before taxes and benefits, the richest fifth (those in the top income quintile group) had an average original income of £78,300 per year, compared with £5,400 for the poorest fifth – a ratio of 14 to 1. This ratio was 16 to 1 in 2010/11, indicating that inequality of original income has reduced between the two years according to this measure, largely due to a fall in original income for the richest fifth of households. Original income includes earnings, private pensions and investments.

Figure 1: The effects of taxes and benefits on household income by quintile groups, ALL households, 2011/12 Source: Office for National Statistics Notes: Households are ranked by their equivalised disposable incomes, using the modified OECD scale Download this chart Figure 1: The effects of taxes and benefits on household income by quintile groups, ALL households, 2011/12 Image .csv .xls

Impact of cash benefits

In contrast to original income, the amount received from cash benefits such as tax credits, housing benefit and income support tends to be higher for poorer households than for richer households. The highest amount of cash benefits were received by households in the second quintile group, £8,400 per year, compared with £7,400 for households in the bottom group. This is largely because more retired households are located in the second quintile group, compared with the bottom group, and in this analysis the state pension is classified as a cash benefit.

The distribution of cash benefits between richer and poorer households has the effect of reducing inequality of income. After cash benefits were taken into account, the richest fifth had income that was six times that of the poorest fifth (gross incomes of £80,700 per year compared with £12,900, respectively). Inequality of gross income has decreased slightly from 2010/11, when this ratio was 7 to 1.

Figure 2: Summary of the effects of taxes and benefits on ALL households, 2011/12

Source: Office for National Statistics

Notes:

Households are ranked by their equivalised disposable incomes, using the modified OECD scale

Impact of direct taxes

On average, households paid £7,400 per year in direct taxes, equivalent to 20% of their gross income. Richer households pay both higher amounts of direct tax and higher proportions of their income in direct tax (income tax, National Insurance, and council tax and Northern Ireland rates). As a result, direct taxes also reduce inequality of income.

The richest fifth of households paid on average £19,900 per year in direct taxes, the vast majority of which was income tax. This corresponds to 25% of their gross income. This is an increase from 24% in 2010/11, driven largely by an increase in Employee’s National Insurance Contributions, caused by several changes including the rate above the Upper Earnings Limit increasing from 1% to 2%.

The average direct tax bill for the poorest fifth was around £1,300 per year, of which the largest component was council tax/rates. This was equivalent to 10% of gross household income for this group, broadly unchanged from the previous year. However, for the second poorest fifth of households, the percentage of gross income paid in direct taxes did fall, from 12% to 11%, largely due to a fall in the proportion of income paid in income tax. This can be explained by the increase in the personal allowance between 2010/11 and 2011/12 from £6,475 to £7,475.

The richest fifth of households had disposable incomes that were five times that of the poorest fifth (£60,800 per year and £11,500, respectively), again showing a fall in income inequality compared with 2010/11 when the ratio was 6 to 1.

Impact of indirect taxes

The amount of indirect tax (such as VAT, and duties on alcohol and fuel) each household pays is determined by their expenditure rather than their income. The richest fifth of households paid two and a half times as much indirect tax as the poorest fifth (£8,700 and £3,400 per year, respectively). This reflects higher expenditure on goods and services subject to these taxes by higher income households. However, although richer households pay more in indirect taxes than poorer ones, they pay less as a proportion of their income. This means that indirect taxes act to increase inequality of income.

In 2011/12, the bottom fifth of households paid 29% of their disposable income in indirect taxes, compared with 14% for the richest fifth. These proportions have increased over the last two years, from 27% and 12% respectively, in 2009/10. The rise in the proportion of income paid in indirect taxes over this time period is largely explained by the increases in the standard rate of VAT from 15.0% to 17.5% on 1 January 2010 and 20.0% on 4 January 2011, which have contributed to an increase in the average amount paid in VAT across all income groups. The VAT increases will also have impacted on inflation rates in these years.

When expressed as a percentage of expenditure, the proportion paid in indirect tax declines less sharply as income rises. The bottom fifth of households paid 21% of their expenditure in indirect taxes compared with 17% for the top fifth. The figure for the top fifth is a slight increase on last year, when the proportion was 16%, while the figure for the bottom fifth is broadly unchanged.

When looking at the total proportion of income paid in taxes (both direct and indirect) there is considerably less variation across the income distribution. Overall, 37% of the gross income of the poorest fifth of households was accounted for by direct and indirect taxes (down 1 percentage point from 2010/11), whilst the richest fifth paid 35% of their income in taxes (up almost 2 percentage points). The lowest effective total tax rate was for the second poorest fifth of households, who paid 31% of their gross income in tax.

After indirect taxes, the richest fifth had post-tax household incomes that were over six times those of the poorest fifth (£52,100 compared with £8,100 per year, respectively).

Table 1: Taxes as a percentage of gross income, disposable income and expenditure for ALL households by quintile groups, 2011/12 Quintile groups of ALL households (1) Bottom 2nd 3rd 4th Top All households (a) Percentages of gross income Direct taxes 10 11 16 21 25 20 Indirect taxes 27 20 17 14 11 15 All taxes 37 31 33 35 36 35 (b) Percentages of disposable income Indirect taxes 29 22 21 18 14 18 (c) Percentages of expenditure (2) Indirect taxes 21 21 20 19 17 19 Source: Office for National Statistics Notes: 1. Households are ranked by equivalised disposable income, using the modified-OECD scale 2. Calculated to be consistent with disposable income. See Further Analysis and Methodology section for the definition of expenditure Download this table Table 1: Taxes as a percentage of gross income, disposable income and expenditure for ALL households by quintile groups, 2011/12 .xls

Impact of benefits in kind

This publication also considers the effect on household income of certain benefits received in kind. Benefits in kind are goods and services provided by the Government to households that are either free at the time of use or at subsidised prices, such as education and health services. These goods and services can be assigned monetary values based on the cost to the Government, which are then allocated as a benefit to individual households. The poorest fifth of households received the equivalent of around £7,700 per year from all benefits in kind, compared with £5,200 received by the top fifth. This is partly due to households towards the bottom of the income distribution having a larger number of children in state education on average. After the impact of benefits in kind are taken into account, the ratio of the richest fifth of households’ final income to the poorest fifth’s is reduced to less than four-to-one (£57,300 per year and £15,800, respectively).