This article analyses the effects of duties on alcohol and tobacco on household disposable income from 1995/96 to 2009/10. It shows that lower income households paid the most on alcohol and tobacco duties as a proportion of their disposable income in 2009/10.
Other findings include:
The richest fifth of households paid the most in alcohol duties in real terms in all years between 1995/96 and 2009/10, though, lower income households paid the most as a proportion of their household disposable income for all periods from 1997/98 onwards.
In real terms, the average amount of alcohol duty paid per household remained relatively constant throughout this period.
Duty on wine accounted for 30 per cent of average household expenditure on alcohol duties in 2009/10, compared with just 15 per cent in 1995/96.
Average real expenditure on tobacco duties declined for all households between 1995/96 and 2009/10, from £395 to £311 per year.
Average expenditure on tobacco duty as a proportion of household disposable income is highest for lower income households, though this proportion fell from 4.8 per cent to 3.0 per cent between 1995/96 and 2009/10.
Since 1995/96, the average amount of alcohol duty paid per household increased from £284 to £309 in 2009/10, expressed in 2009/10 prices. The average amount of alcohol duty paid by all households peaked in 2004/05 at £321, again, expressed in 2009/10 prices.
The top fifth of UK households, or quintile group, as measured by equivalised household disposable income, paid the most, in real terms, on alcohol duties compared to other income quintile groups in all years between 1995/96 and 2009/10. Over the same period, the bottom income quintile group paid the least on duties on alcohol, in real terms.
Changes in payments of alcohol duties varied between income quintile groups over the period 1995/96 and 2009/10. The bottom income quintile group increased their real payments by 56 per cent, while the fourth income quintile group reduced their real payments by 3.0 per cent over this period. The other income quintile groups slightly increased their expenditure on alcohol duties in real terms over the 15 year period.
While expenditure in real terms on alcohol duties by households in the bottom income quintile group was lower than for other groups in 2009/10, lower income groups paid more on alcohol duties as a proportion of their household disposable income than any other income quintile group. In 2009/10 the bottom income quintile group paid 1.6 per cent of their disposable income on alcohol duties.
The proportion of disposable income paid in alcohol duties by the bottom income quintile group peaked in 2001/02 at 1.7 per cent, after increasing from 1.4 per cent in 1995/96. The top income quintile group paid 0.9 per cent of their household disposable income on alcohol duties in 2009/10. This was the smallest proportion of all income quintile groups. There was very little difference in the proportion paid by the three middle income quintile groups in 2009/10. However, they were paying slightly less than in 1995/96 on alcohol duties as a proportion of disposable income.
Between 1995/96 and 2009/10 the gap between what the bottom and top income quintile groups spent on alcohol duties as a proportion of household disposable income grew from 0.3 percentage points to 0.7 percentage points. This was due to the disposable income of the bottom income quintile group growing at a slower rate than their expenditure on alcohol duties. The disposable income of the top income quintile group, on the other hand, grew at a faster rate than the duties paid on alcohol.
In 2009/10, duty on wine accounted for 40 per cent of the total alcohol duty paid by the richest fifth of households. In contrast, for the poorest fifth of households wine duty only accounted for 20 per cent of the total. Furthermore, whilst all households increased the amount paid in wine duty, in relative terms, they decreased the amount paid in beer and cider duty, as a proportion of the total alcohol duty.
The changes in the composition of total alcohol duty can be explained by changes in alcohol consumption and changes in the rates of duties. Figure 4 shows an index of the volume purchased of certain types of alcohol. It shows that purchases of wines, cider and perry, of which wine is the largest component, grew the most over the period 1995 to 2009. In comparison, purchases of beer declined due to a reduction in the amount consumed on premises. Purchases of spirits also grew, but to a lesser extent than wine. Price effects are a factor likely to be contributing to these trends. Since 1995/96, the price of a pint of lager in relation to a bottle of wine, and to a lesser extent a bottle of whisky or vodka, has grown. This price effect may have lead households substituting their consumption away from lager towards other relatively cheaper alcoholic drinks, such as wine.
HM Revenue and Customs produce an Alcohol Factsheet which provides a cash amount of the duty paid on various types of alcohol. This helps to explain the differences in the proportions of duties paid between these time periods. It shows that the proportion of duty paid on a bottle of wine increased between 1995 and 2009, but remained relatively stable for beer and cider. For instance, in 1995, 36 per cent of the price of a bottle of wine was duty, whereas in 2009 this increased to 45 per cent. However, the proportion of duty on the price of a pint of lager was 15 per cent in 1995, which dropped marginally to 14 per cent in 2009. Finally, the proportion of duty paid on a bottle of whisky dropped from 52 per cent in 1995 to 47 per cent in 2009.
Average real expenditure on tobacco duties declined for all households from 1995/96 to 2009/10. The greatest decline was for the top income quintile group who reduced their real expenditure on tobacco duties by 31 per cent. The three middle income quintile households consistently spent the most in real terms on tobacco duties.
The fall in average real expenditure on tobacco duties was due to falling consumption, whilst the duty levied on tobacco increased in line with prices. Figure 6, using data from the General Lifestyle Survey shows the extent to which cigarette smoking – the largest component of tobacco consumption - declined since the mid-1970s. In 1994, 27 per cent of people smoked cigarettes, which dropped to 21 per cent by 2009.
In 2009/10 the bottom income quintile group paid more on tobacco duties as a proportion of disposable income (3.0 per cent) than any other quintile group, whereas the top quintile group paid the least (0.3 per cent).
Between 1995/96 and 2009/10, the proportion of disposable income spent on tobacco duties fell for all income quintile groups. The top income quintile group experienced a fall of just over 50 per cent in the proportion of disposable income spent on tobacco duty, the largest fall of all income quintile groups. This was due to these households having the fastest growing disposable income over the period, coupled with the largest decline in cash terms on tobacco duty paid.
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Alcohol and Tobacco duties
Alcohol duties are levied by volume, while tobacco duties are levied by volume and price. Alcohol and tobacco duty is not paid by households directly, but passed on by the manufacturer.
Equivalisation is used in producing the household distribution used in this analysis as it adjusts incomes according to differences in household size and composition. The equivalence scale used is the modified-OECD scale. Expenditure data, however, are not equivalised.
This article covers the years 1995/96 to 2009/10. This is the period over which the methodology to calculate duties on alcohol and tobacco at a household level within The Effects of Taxes and Benefits on Household Income analysis has been consistent. The methodology uses the total receipt of duties on alcohol and tobacco from HMRC. An adjustment is made to account for foreign, business and institutional household expenditure on alcohol and tobacco, as the Living Costs and Food survey covers private households only. Expenditure on alcohol and tobacco from the Living Costs and Food survey is then used to apportion the total duties to households.
Households are ranked according to their equivalised household disposable income and then divided into five groups of equal size. Poorest households refer to those that have the least disposable income, and richest households refer to those that have the most.
Data are from the Living Costs and Food survey, formally known as the Expenditure and Food survey. Data on rates of alcohol duty are from HM Revenue and Customs Fact Sheet March 2010. Data on smoking rates are from the General Lifestyle Survey.