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Scotland - Household Taxes and Benefits: update

In response to a specific enquiry in May 2012, SPICe, using secondary analysis, produced figures showing different scenarios to estimate the percentage of households in which household benefits exceeded household taxes.  Depending on the assumptions made about what to include in household benefits, the resulting values ranged from 66-88% of households as net recipients.  These figures were in part derived from 2009-10 Office for National Statistics (ONS) data on household taxes and benefits.  They were not directly produced by ONS. All key assumptions by SPICe were laid out in the response.

In June 2012 ONS published figures on the Effects of Taxes and Benefits on Household Income for 2010-11.  These showed that on average household benefits exceeded household taxes in the first six deciles of pre-tax household incomes.

Following discussion in the media and in response to a request from SPICe, the Office for National Statistics has now published data and related analysis (31.5 Kb Excel sheet) on household receipts of taxes and benefits in Scotland and the UK.  This is derived from a direct analysis of the original micro-data.  The SPICe analysis was prepared by making a range of assumptions so as to produce the various scenarios but without an analysis of the detailed micro-data. Given this, the ONS data should be regarded as the official source, superseding the figures previously produced by SPICe.

As is indicated below the ONS figures include only those taxes and benefits (including benefits in kind) which can be attributed directly to households.  One of the scenarios produced by SPICe (which generated the widely quoted 12% figure), was based on inclusion of all public spending, using data from both ONS and GERS.   As the analysis by SPICe showed, the definition of public benefits has a very large impact on the percentages of households considered to be net contributors.

On the basis of the more detailed ONS data, the percentage of households paying more in taxes than receiving benefits in 2010-11 in Scotland is 47.3% (or, conversely, 52.7% of households receive more in benefits than they pay in taxes).

Households receiving more in benefits than paid in taxes1, 2009/10 & 2010/11

Scotland & UK, 2009/10 & 2010/11
Households receiving more in benefits than paid in taxes1
Percentage Number (000's)
2009/10 51.0 1 211
2010/11 52.7 1 232
2009/10 53.1 13 847
2010/11 53.4 14 031

Source: Office for National Statistics

1 Benefits include both cash benefits (such as the state pension, housing benefit and tax credits) and benefits in kind (such as education and the NHS). Items of Government expenditure for which there is no clear conceptual basis for allocation is excluded (such as capital expenditure, expenditure on defence, overseas aid and public sector interest payments). Taxes include both direct and indirect taxes.  Further details of the taxes/benefits included in this analysis are available in the following publication:
The Effects of Taxes and Benefits on Household Income, 2010/2011 – Further Analysis and Methodology

Further information

Households with higher incomes generally pay more in taxes and receive less in benefits than households with lower incomes.  Taxes take the form of direct taxes such as income tax, National Insurance and council tax; and indirect taxes such as VAT and duty on tobacco, alcohol and fuel.  Benefits take the form of cash payments such as state pension, job seekers allowance and invalidity benefit; and benefits in kind such as health, education and bus and rail subsidies.

If all households were ranked by income there would not be a smooth progression of rising taxes and falling benefits with rising income.  Some households with high incomes can receive high benefits e.g. if there are several school age children in the household; and some households with a low income may receive modest benefits e.g. if the members are healthy, in work and not in education such as young people at the start of their working life.  When looking at the aggregate data, it is only possible, for a group of households at a particular income level, to calculate the average taxes paid and benefits received.

The Office of National Statistics (ONS) publishes figures showing how taxes and benefits vary with equivalised household income.   Equivalising adjusts household income to allow for the number of people in the household.

The taxes and benefits used by ONS in their calculation do not cover all the taxes paid across the whole economy or the cost of all services provided by government.  Corporation tax, non-domestic rates, other taxes on businesses and taxes on North Sea oil and gas are excluded on the grounds that they are not directly levied on households.  Spending on defence, overseas development and public administration are excluded from the calculation of household benefits.  Capital expenditure is also excluded on the grounds that the benefits of such spending occur after the spending has taken place and are reflected in the depreciation charges included in current expenditure.

The table below sets out the latest (2010-11) ONS data for household income, taxes and benefits ranked by 10 per cent bands (deciles).  The lowest income decile has an average pre-tax income of £3,573.  Taxes paid by households in this decile average £4,621 while benefits received average £13,460 to give a notional income after taxes and benefits of £12,412.  Average taxes paid are able to exceed pre-tax income because household income is supplemented by cash benefits and expenditure may be increased by drawing down savings.

The highest income decile has a pre-tax income almost 30 times the lowest income decile but after tax and benefits the ratio is a little over 6. 

The purpose of these figures is to show the redistributive effect of taxation and welfare policies on households.  However they have also been used to calculate the number of households in Scotland and the UK which pay more in taxes than they receive in benefits.

Decile 1 2 3 4 5 6 7 8 9 10 Average
Pre-tax income 3 573 6 605 9 895 13 632 18 359 26 605 35 225 44 058 57 417 105585 30 096
Direct taxes 1 122 1 420 2 109 2 910 3 816 5 694 7 746 10 258 13 885 25 563 7 453
Indirect taxes 3499 3231 3 632 3850 4457 5083 5733 6334 7300 9379 5250 
Total taxes 4 621 4 651 5 741 6 760 8 273 10 777 13 479 16 592 21 185 34 948 12 703
Cash benefits 6 049 8 031 8 469 8 175 7 322 5 987 4 708 3 488 2 362 1 868 5 646
In kind benefits 7 411 8 087 7 675 7 494 7 203 7 715 7 265 6 384 6 009 5 643 7 089
Total benefits 13 460 16 118 13 144 15 669 14 525 13 702 11 973 9 872 8 731 7 511 12 735
Taxes - benefits -8 839 -11 467 -10 403 -8 909 -6 252 -2 925 1 506 6 720 12 814 27 437 -32
Income after taxes and benefits 12 412 18 072 20 298 22 541 24 611 29 530 33 719 37 338 44 603 78 148 32 128

ONS have analysed the raw data for Scotland and the UK.  Their analyses shows that in 2010-11 53.4% of UK and 52.7% of Scottish households received more in benefits than they paid in taxes.

This analysis was not available to SPICe when asked in May 2012 to provide information on the proportion of households in Scotland which were net contributors i.e. household taxes exceeded household benefits.

A total of four spreadsheets were provided by SPICe using different assumptions about what is included in household benefits.

The first spreadsheet used published ONS data for 2009-10 showing the effects of taxes and benefits on household income.  This shows that on average, households in the lowest six deciles received more in benefits than they paid in taxes.  SPICe estimated by interpolation that the breakeven was at 34% (compared to the ONS figure for the percentage of net ‘contributors’ of 47%).  Other worksheets showed calculations with increasing levels of public expenditure.

Content from the Office for National Statistics.
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