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 2012/13, before taxes and benefits, the richest fifth (those in the top income quintile group) had an average original income of £81,300 per year, compared with £5,500 for the poorest fifth – a ratio of nearly 15 to 1. This ratio is broadly unchanged from 2011/12, indicating that inequality of original income has not changed substantially between the two years, according to this measure. Original income includes earnings, private pensions1 and investments.

Figure 1: The effects of taxes and benefits on household income by quintile groups, ALL households, 2012/13 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, 2012/13 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 was received by households in the second quintile group, £8,800 per year compared with £7,200 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 an average income that was roughly six and a half times the poorest fifth (gross incomes of £84,000 per year compared with £12,700, respectively), a proportion that was broadly unchanged on the previous year.

Looking at individual cash benefits, the average amount of tax credits received by the poorest fifth of houses fell between 2011/12 and 2012/13. This may be partly explained by some of the changes which occurred to tax credits in this year, including an increase in the weekly working hours requirement in Working Tax Credit from 16 to 24 for couples with children, the introduction of a disregard for within-year falls in income (which would previously have triggered increases in tax credit entitlements), and reductions in backdating of claims.

Another key change to tax credits was the withdrawal of the family element of Child Tax Credit at lower income levels than before. This is likely to have contributed to reductions in income from tax credits further up the income distribution.

Figure 2: Summary of the effects of taxes and benefits on ALL households, 2012/13

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 19% of their gross income. Richer households pay both higher amounts of direct tax and higher proportions of their income in direct taxes (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 £20,300 per year in direct taxes, the vast majority of which was Income Tax. This corresponds to 24% of their gross income, broadly unchanged from other recent years.

The average direct tax bill for the poorest fifth was £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, unchanged from last year.

The richest fifth of households had disposable incomes that were around five and a half times that of the poorest fifth (£63,600 per year and £11,400, respectively), a similar ratio to 2011/12.

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 just over two and a half times as much indirect tax as the poorest fifth (£9,100 and £3,500 per year, respectively). This reflects greater 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 2012/13, the richest fifth of households paid 14% of their disposable income in indirect taxes. This is unchanged from 2011/12. The bottom fifth of households paid 31% of their disposable income in indirect taxes, an increase from 2011/12.

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 20% of their expenditure in indirect taxes compared with 17% for the top fifth. The figure for the poorest fifth is a decrease on last year, when the proportion was 21%, while the figure for the richest fifth is broadly unchanged. The combination of an increase in indirect taxes as a percentage of disposable income and a decrease as a percentage of expenditure for the bottom fifth of households is explained by the average disposable income for this group falling slightly between 2011/12 and 2012/13 after adjusting for inflation, but average expenditure increasing.

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, while the richest fifth paid 35% of their income in taxes. Both are unchanged from 2011/12. The lowest effective total tax rate was for the second poorest fifth of households, who paid 30% of their gross income in tax. After indirect taxes, the richest fifth had post-tax household incomes that were nearly seven times those of the poorest fifth (£54,500 compared with £7,900 per year, respectively). This is a very slight increase from 2011/12, when the ratio was closer to six to one.

Table 1: Taxes as a percentage of gross income, disposable income and expenditure for ALL households by quintile groups, 2012/13 Quintile groups of ALL households 1 Bottom 2nd 3rd 4th Top All households (a) Percentages of gross income Direct taxes 10 11 16 20 24 20 Indirect taxes 28 19 17 15 11 15 All taxes 37 30 33 35 35 34 (b) Percentages of disposable income Indirect taxes 31 22 20 19 14 18 (c) Percentages of expenditure 2 Indirect taxes 20 20 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, 2012/13 .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 a monetary value based on the cost to the Government which is then allocated as a benefit to individual households. The poorest fifth of households received the equivalent of £7,600 per year from all benefits in kind, compared with £5,400 received by the top fifth. This is partly due to households towards the bottom of the income distribution having, on average, a larger number of children in state education. After the impact of benefits in kind is 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 (£59,900 per year and £15,600, respectively).

Overall, 52% of households received more in benefits (including in-kind benefits such as education) than they paid in taxes (direct and indirect) in 2012/13, unchanged from the previous year. This is equivalent to 13.8 million households.

Table 2: Summary of the effects of taxes and benefits by quintile groups on ALL households, 2012/13 Quintile groups of ALL households 1 Bottom 2nd 3rd 4th Top All households Ratio Top/Bottom quintile Original income 5,536 11,952 23,069 38,697 81,284 32,108 14.7 plus cash benefits 7,154 8,817 6,622 4,691 2,666 5,990 0.4 Gross income 12,690 20,769 29,692 43,388 83,950 38,098 6.6 less direct taxes and employees' NIC 1,256 2,257 4,620 8,635 20,322 7,418 16.2 Disposable income 11,434 18,512 25,072 34,753 63,628 30,680 5.6 less indirect taxes 3,488 3,986 5,029 6,474 9,140 5,623 2.6 Post-tax income 7,946 14,527 20,043 28,279 54,488 25,057 6.9 plus benefits in kind 7,646 7,617 7,026 6,193 5,403 6,777 0.7 Final income 15,592 22,143 27,069 34,472 59,890 31,834 3.8 Household type (percentages) Retired 34 41 29 21 11 27 Non-retired 66 59 71 79 89 73 All household types 100 100 100 100 100 100 Source: Office for National Statistics Notes: 1. Households are ranked by equivalised disposable income, using the modified-OECD scale Download this table Table 2: Summary of the effects of taxes and benefits by quintile groups on ALL households, 2012/13 .xls

Notes for Summary of results for all households