According to data released by the Office for National Statistics (ONS), In 2011/12, the bottom 20% of households in the UK in terms of wealth saw nearly a third of their disposable income go on indirect taxes such as fuel, alcohol and tobacco duty, and VAT.
However, the ONS also found that once direct taxes were added into the equation, the total amount paid in taxes for the wealthiest of people and the poorest is now at its lowest for 26 years.
The wealth equality gap has narrowed due to the increase of VAT—going from 17.5% up to 20% in January 2011. This has meant that lower income households are now paying more indirect tax, on average around £3,400 or 29% of their disposable income each year.
Meanwhile, the richest 20% of UK households paid more indirect taxes, an average of £8,700 or 14% of their disposable income. The ONS said that the increase in indirect taxes has led to an increased inequality of income.
Unions have said the data shows that the Coalition need to look at decreasing the VAT rate instead of raising the personal income tax allowance to £10,000—which has been part of Nick Clegg’s key pledge for the Liberal Democrats, as this will be of more benefit to lower income households than a reduction in income tax.
Across all income categories, UK households have seen their disposable incomes drop by an average of £1,200 over the last three years, but the changes introduced in the benefits system and taxes, both income tax and indirect taxes, has meant that wealth inequality between the top and bottom fifth of UK households has been slightly reduced.
The richest 20% of UK households have seen their disposable incomes cut by 6.8% since 2010, whereas the bottom 20% of households have benefitted from changes to the system and seen a 6.9% increase in their disposable income.
Before any benefits are added or taxes taken away, the richest bracket of households has an average yearly disposable income of £78,300, compared to the poorest bracket of households who have £5,400 a year—14 times less. Last year the richer bracket has 16 times more disposable income than the bottom 20%.
However, once benefits such as tax credits and state pensions were taken into accounts, the top fifth of households’ disposable income rose to an average of £80,700 a year, and the poorest fifth increased to average of £12,900.
When it comes to direct taxes, the average household in the UK will pay out £7,400 each year, or around 20% of their gross income. The poorest fifth of UK households pay approximately 10% of their gross income or £1,300 a year, most of which will be council tax. The richest category of households pays an average of 25% or £19,900 of their gross income, with the majority being income tax.