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Statistical bulletin: The Effects of Taxes and Benefits on Household Income, 2010/11 This product is designated as National Statistics

Released: 26 June 2012 Download PDF

Key points

  • Before taxes and benefits, the richest fifth of households had an average income of £81,500 in 2010/11, 16 times greater than the poorest fifth, who had an average income of £5,100.
  • Overall, taxes and benefits lead to income being shared more equally between households. After all taxes and benefits are taken into account, the ratio between the average incomes of the top and the bottom fifth households (£61,400 and £15,200 respectively) is reduced to four-to-one.
  • Cash benefits and direct taxes have the impact of redistributing income from richer households to those with lower incomes, thereby reducing income inequality. In contrast, indirect taxes such as VAT and duties on fuel and alcohol take a higher proportion of income from lower income households, and therefore increase income inequality.
  • On average, households in the top two income quintiles paid more in taxes than they received in benefits, while households in the bottom three quintiles received more in benefits than they paid in taxes.
  • There was a real terms decrease in disposable income between 2009/10 and 2010/11, with the largest fall being for the middle fifth of households.
  • The proportion of disposable income paid in indirect taxes increased across the income distribution in 2010/11 compared with the previous year. This is largely explained by the increases to the standard rate of VAT in 2010 and 2011.

Stages of redistribution

This bulletin examines how taxes and benefits redistribute income between various groups of households in the UK. The release shows where different types of households are in the income distribution and looks at the changing levels of income inequality over time. The distribution of income in this release is analysed in five stages, summarised below and in Diagram A:

  1. Household members begin with income from employment, private pensions, investments and from other non-government sources. This is referred to as ‘original income’

  2. Households then receive income from cash benefits. Cash benefits, when added to original income, is referred to a ‘gross income’

  3. Households then pay direct taxes. Gross income minus direct taxes is referred to as ‘disposable income’

  4. Indirect taxes are then paid via expenditure, which when subtracted from disposable income is referred to as ‘post-tax income’

  5. Households finally receive a benefit from services (benefits in kind). Benefits in kind plus post-tax income is referred to as ‘final income’.

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 2010/11, before taxes and benefits, the richest fifth (those in the top income quintile group) had an average original income of £81,500 per year, compared with £5,100 for the poorest fifth – a ratio of 16 to 1. This ratio was also 16 to 1 in 2009/10, indicating that inequality of original income has not changed between the two years according to this measure. Original income includes earnings, private pensions1 and investments.

Original income and Final income by quintile groups for ALL households, 2010/11

Original income and Final income by quintile groups for ALL households, 2010/11
Source: Office for National Statistics

Notes:

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

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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 largest cash benefits were received by households in the second quintile group, £8,300 per year, compared with £7,000 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 seven times that of the poorest fifth (gross incomes of £83,600 per year compared with £12,100, respectively), a proportion that was unchanged on the previous year.

Summary of effects of taxes and benefits by quintile groups, ALL households, 2010/11

Summary of effects of taxes and benefits by quintile groups, ALL households, 2010/11
Source: Office for National Statistics

Notes:

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

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Impact of Direct Taxes

On average households paid £7,500 per year in direct taxes, equivalent to 20 per cent 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 £19,700 per year in direct taxes, the vast majority of which was income tax. This corresponds to 24 per cent of their gross income. In contrast, 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 per cent of gross household income for this group. These proportions are broadly unchanged on those for the previous year. The richest fifth of households had disposable incomes that were six times that of the poorest fifth (£63,900 per year and £10,900, respectively), a ratio that was the same in 2009/10.

Overall, there was a real terms decrease in disposable income between 2009/10 and 2010/11, with incomes falling by almost £200 on average, to £30,300. The largest fall was for the middle fifth of households with disposable incomes decreasing by 4.3 per cent from £25,5002 to £24,400 in real terms. This was largely driven by a decrease in income from wages and salaries for this group.

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 (£8,300 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 2010/11, the bottom fifth of households paid 31 per cent of their disposable income in indirect taxes, compared with 13 per cent for the richest fifth, an increase from 2009/10 when the proportions were 28 per cent and 12 per cent, respectively. This 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 per cent to 17.5 per cent on 1 January 2010 and 20.0 per cent on 4 January 2011, which have contributed to an increase in the average amount paid in VAT across all income groups. The effect of indirect taxes on household income has been examined in more detail in a number of other recent ONS articles. Links to these articles are available in Background Note 11.

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 per cent of their expenditure in indirect taxes compared with 16 per cent for the top fifth, a slight increase on the previous year, when the proportions were 20 per cent and 15 per cent, respectively.

After indirect taxes the richest fifth had post-tax household incomes that were over seven times those of the poorest fifth (£55,600 compared with £7,500 per year, respectively).

Taxes as a percentage of income and expenditure, ALL households, 2010/11

   Quintile groups of ALL households1
Bottom   2nd   3rd   4th   Top All households
(a) Percentages of gross income            
Direct taxes 10.5 12.5 16.3 20.6 23.6 19.7
Indirect taxes 27.7 18.6 16.4 13.8 10.0 13.9
All taxes 38.2 31.1 32.7 34.4 33.6 33.7
(b) Percentages of disposable income            
Indirect taxes 31.0 21.3 19.6 17.4 13.1 17.3
(c) Percentages of expenditure2            
Indirect taxes 20.5 20.3 19.3 18.1 16.1 18.1

Table source: Office for National Statistics

Table 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.

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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 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 £5,800 received by the top fifth. 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 four-to-one (£61,400 per year and £15,200, respectively).

Income, taxes and benefits, by quintile groups, ALL households, 2010/11

  Quintile groups of ALL households1   Ratio Top/Bottom quintile
Bottom      2nd     3rd     4th    Top All households
Income, taxes and benefits per household (£ per year)            
  Original income 5,089 11,764 22,482 39,642 81,501 32,096  16
    plus cash benefits 7,040 8,322 6,655 4,098 2,115 5,646 0.3
  Gross income 12,129 20,086 29,137 43,740 83,616 37,741  7
    less direct taxes and employees' NIC 1,271 2,510 4,755 9,002 19,727 7,453  16
  Disposable income 10,858 17,576 24,382 34,737 63,890 30,288  6
    less indirect taxes 3,365 3,741 4,770 6,033 8,339 5,250  2
  Post-tax income 7,493 13,835 19,612 28,704 55,550 25,039  7
    plus benefits in kind 7,749 7,584 7,459 6,825 5,826 7,089 0.8
  Final income 15,242 21,419 27,071 35,529 61,376 32,127  4
Household type (percentages)              
Retired  35  43  31  18  9  27  
Non-retired  65  57  69  82  91  73  
All household types  100  100  100  100  100  100  

Table source: Office for National Statistics

Table notes:

  1. Households are ranked by equivalised disposable income, using the modified-OECD scale.

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Notes for Summary of results for all households

  1. Private pensions include all non-state pensions whether occupational or personal.
  2. For the purpose of this comparison, 2009/10 incomes have been adjusted to 2010/11 prices using the implied expenditure deflator for the household sector.

Retired households

Retired households are those where the income of retired household members accounts for the majority of the total household gross income (see the background note for the definition of a retired person). Retired households have different income and expenditure patterns to their non-retired counterparts.

Retired households were much more likely to be towards the bottom of the income distribution than at the top of the distribution. Whereas retired households made up 35 and 43 per cent of the bottom and second quintile groups respectively, they only made up 9 per cent of the top group in 2010/11.

Among retired households, there is a higher degree of income inequality before taxes and benefits than for non-retired households. One way of looking at income inequality is to see what proportion of income is received by the richest fifth (20 per cent) of households. In 2010/11, the richest fifth of retired households received 57 per cent of total original income for all retired households. In comparison, the richest 20 percent of non-retired households received 47 per cent of total income for that group. Another widely used measure of inequality in the distribution of household income is the Gini coefficient. Gini coefficients can vary between 0 and 100 and the lower the value, the more equally household income is distributed. In 2010/11, the Gini coefficient for original income was 61 per cent for retired households, compared with 46 per cent for non-retired households.

Taxes and benefits have a particularly significant redistributive effect on the income of retired households, meaning that, in contrast, disposable income inequality is much lower for retired households than for non-retired households. Cash benefits play by far the largest part in bringing about this reduction, due principally to the state retirement pension. Retired households’ Gini coefficient for disposable income was 26 per cent compared with 35 per cent for non-retired households. The corresponding coefficients for 2009/10 were 24 per cent, and 34 per cent, respectively.

On average, the poorest fifth of retired households received £7,700 per year from cash benefits, while those in the other quintile groups received between £9,800 and £11,400 per year. Cash benefits represent half (50 per cent) of retired households’ total gross income on average, a proportion which is higher for poorer households and lower for richer households (80 per cent for the poorest fifth of retired households and 26 per cent for the richest fifth). Of the total value of retired households’ cash benefits, just over three-quarters (77 per cent) was due to the state pension, on average.

Retired households typically derive significant benefits from the National Health Service (NHS). The benefit in kind from the NHS is spread fairly evenly across the income range of retired households and in 2010/11 it was worth an average of £5,600 per year, per household. The benefit derived from the NHS makes up 95 per cent of the total benefit in kind received by retired households, on average.

Summary of the effects of taxes and benefits, RETIRED households, 2010/11

  Quintile groups of RETIRED households1
Income, taxes and benefits per household (£ per year) Bottom 2nd  3rd  4th  Top All retired households Ratio Top/Bottom quintile 
Original income 1,929 3,746 6,027 10,157 28,908 10,153  15
  plus Total cash benefits 7,677 9,756 10,853 11,403 10,193 9,977 1.3
Gross income 9,606 13,502 16,880 21,560 39,101 20,130  4
  less Direct taxes  995 1,220 1,585 2,381 6,099 2,456  6
Disposable income 8,610 12,283 15,295 19,179 33,002 17,674  4
  less Indirect taxes 2,412 2,582 2,983 3,597 5,465 3,408  2
Post-tax income 6,198 9,700 12,312 15,582 27,537 14,266  4
  plus National Health Service 5,484 5,425 5,465 5,876 5,740 5,598  
        Housing subsidy  16  33  42  39  4  27  
Other benefits in kind  239  202  444  241  228  271  
Final income 11,938 15,360 18,264 21,738 33,510 20,162  3
percentage of gross income  80  72  64  53  26  50  
State pension as a              
percentage of cash benefits  81  77  73  72  84  77  

Table source: Office for National Statistics

Table notes:

  1. Households are ranked by equivalised disposable income, using the modified-OECD scale.

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Non-retired households

Taxes and benefits also lead to income being shared more equally between non-retired households, though the effect is smaller than for retired households. Before taxes and benefits, there is less inequality of non-retired households’ income than for retired households. However, after the process of redistribution, inequality of post-tax income (as measured, for example, by the Gini coefficient) is greater than that for retired households. In 2010/11 the Gini coefficient for post-tax income was 39 per cent for non-retired households compared with 30 per cent for retired households.  The equivalent Gini for non-retired households was 38 per cent in 2009/10. This rise can be partly attributed to the increase in the proportion of income paid in indirect taxes by households at the lower end of the income distribution.

In 2010/11, the average original income for non-retired households was £40,300 per year. As might be expected, the original income of non-retired households showed a relatively strong relationship to the number of economically active people they contained. On average, households in each of the top three quintile groups contained almost twice as many economically active people as those in the lowest group.

Cash benefits provided 47 per cent of gross income for households in the bottom quintile group, falling to just 1.5 per cent for households in the top quintile. Their payment results in a significant reduction in income inequality. The patterns for direct and indirect taxes are similar to those described for all households.

Of those benefits in kind for which a value can be assigned to households, the largest two categories for non-retired households are education and health. The poorest fifth of non-retired households received the highest value from benefits in kind, on average £9,000 per year in 2010/11. This is mainly due to the relatively high average number of children per household in this part of the income distribution.

Summary of the effects of taxes and benefits by quintile groups, NON-RETIRED households, 2010/11

  Quintile groups of NON-RETIRED households1   Ratio Top/Bottom quintile
Income, taxes and benefits per household (£ per year)  Bottom      2nd     3rd     4th    Top All households
  Original income 7,442 19,305 33,186 48,914 92,675 40,305  12
    plus cash benefits 6,586 6,112 3,798 2,235 1,396 4,026 0.2
  Gross income 14,028 25,418 36,984 51,150 94,071 44,330  7
    less direct taxes  1,547 3,812 7,097 11,414 22,741 9,322  15
  Disposable income 12,481 21,605 29,888 39,735 71,330 35,008  6
    less indirect taxes 3,926 4,655 5,552 6,764 8,797 5,939  2
  Post-tax income 8,554 16,950 24,336 32,971 62,534 29,069  7
    plus benefits in kind 9,012 8,323 7,969 6,495 5,874 7,535 0.7
  Final income 17,566 25,274 32,305 39,466 68,407 36,604  4
Number of individuals per household              
  Children2 1.0 0.8 0.7 0.5 0.5 0.7  
  Adults 1.7 1.9 2.1 2.1 2.0 2.0  
     Men 0.8 0.9 1.0 1.1 1.1 1.0  
     Women 0.9 1.0 1.0 1.0 0.9 1.0  
  People 2.7 2.8 2.7 2.6 2.5 2.7  
  People in full-time education 1.0 0.8 0.7 0.5 0.5 0.7  
  Economically active people 1.0 1.5 1.8 1.9 1.9 1.6  
  Retired people 0.0 0.1 0.1 0.1 0.1 0.1  

Table source: Office for National Statistics

Table notes:

  1. Households are ranked by equivalised disposable income, using the modified-OECD scale.
  2. Children are defined as people aged under 16 or aged between 16 and 18, unmarried and receiving non-advanced further education.

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Background notes

  1. Today’s analysis, along with The effects of taxes and benefits on household income, 2010/11: Further analysis and methodology can be found on the ONS website.

  2. This analysis has been undertaken each year since the 1960s. Where it is practical, the methodology used is similar to that used in previous years. However, there have been some changes in the underlying surveys and improvements made to the methodology. For this reason, one should be cautious about making direct comparisons with earlier years. Comparisons with previous years are also affected by sampling error (for more details see the technical paper). Time series are presented for inequality measures.

  3. Glossary

    Equivalisation: Income quintile groups are based on a ranking of households by equivalised disposable income. Equivalisation adjusts incomes according to differences in household size and composition to account for the fact that different size households require different incomes to achieve the same standard of living. This analysis has used the modified-OECD equivalisation scale (165.7 Kb Pdf) since 2009/10. Previously the McClements Scale was used.

    Gini coefficients: The most widely used summary measure of inequality in the distribution of household income is the Gini coefficient. The lower the value of the Gini coefficient, the more equally household income is distributed. A Gini coefficient of 0 would indicate perfect equality where every member of the population has exactly the same income, whilst a Gini coefficient of 100 would indicate that one person would have all the income.

    Household income: This analysis uses several different measures of household income. Original income (before taxes and benefits) includes income from wages and salaries, self-employment, private pensions and investments. Gross income includes all original income plus cash benefits provided by the state. Disposable income is that which is available for consumption, and is equal to gross income less direct taxes. Post-tax income is calculated by estimating the payment of indirect taxes, and deducting these from disposable income. Final income is calculated as post-tax income plus benefits in kind received from the state.

    Retired persons and households: A retired person is defined as anyone who describes themselves (in the Living Costs & Food survey) as ‘retired’ or anyone over minimum National Insurance pension age describing themselves as ‘unoccupied’ or ‘sick or injured but not intending to seek work’. A retired household is defined as one where the combined income of retired members amounts to at least half the total gross income of the household.

  4. Users of these statistics

    The statistics contained within this release are of particular interest to HM Treasury (HMT), HM Revenue and Customs (HMRC) and the Department for Work and Pensions (DWP) in determining policies on taxation and benefits and in preparing Budget and pre-budget reports. A dataset, based on that used to produce these statistics, is used by HMT in conjunction with the Family Resources Survey (FRS) in their Intra-Governmental Tax and Benefit Microsimulation Model (IGOTM). This is used to model possible tax and benefit changes before policy changes are decided and announced.

    In addition to policy uses in Government, the statistics are frequently used and referenced in research work by academia, think tanks and articles in the media. These pieces often examine the impact of Government policy, or are used to advance public understand of tax and benefit matters.  The data used to produce this release is made available to other researchers via the UK Data Archive.

    These statistics allow for analysis of the distributional impact of government policy on taxes and benefits. They are the only statistics available that are able to give such a complete picture of the distribution of income including indirect taxes and benefits in kind. The 2009 report by the Commission on the Measurement of Economic Performance and Social Progress by Stiglitz, Sen and Fitoussi identified income distribution, in addition to measures of average income, as an important factor in the measurement of well-being, giving a more complete picture of the standards of living experienced by individuals.

  5. Quality and Methodology Information

    A Quality and Methodology Information document (101.8 Kb Pdf) for these statistics is available on the ONS website.

  6. The primary source of the estimates reported in this release is the Living Costs and Food survey (LCF). As the LCF is a sample survey, the estimates produced from it will be subject to sampling error. While each sample is designed to produce the ‘best‘ estimate of the true population value, a number of equal sized samples covering the population would generally produce varying population estimates. A 95 per cent confidence interval is a range within which the true population would fall for 95 per cent of the times the sample survey was repeated. It is a standard way of expressing the statistical accuracy of a survey based estimate. If an estimate has a high error level, the corresponding confidence interval will be very wide. Estimates of the confidence intervals are provided in the table below:

    95 per cent confidence intervals for gross and disposable income of households, and as a percentage of the published estimate, 2010/11

    Average per household (£ per year)
      Gross income Disposable income
    Lower bound Published estimate Upper bound Lower bound Published estimate Upper bound
    All households                
    Bottom decile group 9,183 9,622 10,061 4.6 8,119 8,500 8,881 4.5
    Mean 36,602 37,741 38,880 3.0 29,430 30,288 31,146 2.8
    Top decile group  100,844 107,454 114,064 6.2 76,737 81,885 87,033 6.3
    Retired households                
    Bottom decile group 7,841 8,259 8,677 5.1 6,809 7,192 7,575 5.3
    Mean 19,330 20,130 20,930 4.0 17,013 17,674 18,335 3.7
    Top decile group  38,286 47,992 57,698 20.2 31,503 39,991 48,479 21.2
    Non-retired households                
    Bottom decile group 9,855 10,461 11,067 5.8 8,721 9,260 9,799 5.8
    Mean 42,725 44,330 45,935 3.6 33,811 35,008 36,205 3.4
    Top decile group  113,276 120,675 128,074 6.1 85,591 91,350 97,109 6.3

    Table source: Office for National Statistics

    Table notes:

    1. Ranked by equivalised disposable income.

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  7. Further analysis of these statistics is planned for this year. This will include an article, due for release in summer 2012, on the recent changes to the methodologies for estimating the value and distribution of benefits in kind, which will be accompanied by a consistent recent time series for this data. Additionally, it is expected that a number of short articles analysing particular aspects of these data will be published. 

  8. Related statistics and analysis

    In 2011, ONS published a number of articles examining the impact of indirect taxes in greater detail.  These included:

  9. The Department for Work and Pensions (DWP) publishes analysis each year of the income distribution in their publication Households Below Average Income (HBAI), based on data from the Family Resources Survey (FRS). Further information can be found in the latest publication, including data for 2010/11, released 14 June 2012.

    There are commonalities between HBAI and the estimates presented in this analysis. Where this is the case, the two publications are broadly consistent in the main messages and trends.

  10. Measuring National Well-being

    This release adds to the evidence base amassed as part of the ONS Measuring National Well-being Programme. The programme aims to produce accepted and trusted measures of the well-being of the nation - how the UK as a whole is doing. It is about looking at 'GDP and beyond' and includes:

    • greater analysis of the national economic accounts, especially to understand household income, expenditure and wealth,

    • further accounts linked to the national accounts, including the UK Environmental Accounts and valuing household production and 'human capital',

    • quality of life measures, looking at different areas of national well-being such as health, relationships, job satisfaction, economic security, education environmental conditions,

    • working with others to include the measurement of the well-being of children and young people as part of national well-being,

    • measures of 'subjective well-being' - individuals' assessment of their own well-being,

    • headline indicators to summarise national well-being and the progress we are making as a society.

    The programme is underpinned by a communication and engagement workstream, providing links with Cabinet Office and policy departments, international developments, the public and other stakeholders. The programme is working closely with Defra on the measurement of 'sustainable development' to provide a complete picture of national well-being, progress and sustainable development.

    Find out more on the Measuring National Well-being website pages.

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  13. Watch our videos on YouTube.

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    These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.

Statistical contacts

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