Income inequality ‘lowest since 1986’

Income inequality in 2011-12 was at its lowest point since 1986, according to the Office for National Statistics. In its latest annual report on the impact of tax and benefits, it calculates that the Gini coefficient for disposable income in 2011-12 was 32.3 per cent, a fall from its 2010-11 value of 33.7 per cent.

Key points

The fall in income inequality in 2011-12 was driven partly by a fall in earnings for higher-income households, and partly by changes in taxes and benefits – such as an increase in the income tax personal allowance, and changes to national insurance contributions and child tax credits.
Disposable incomes have fallen since the start of the economic downturn, with average equivalised income falling by £1,200 a year since 2007-08 in real terms. The fall in income has been largest for the richest fifth of households (6.8 per cent). In contrast, after accounting for inflation and household composition, average income for the poorest fifth has grown over this period (6.9 per cent).
Before taxes and benefits, the richest fifth of households had an average income of £78,300 in 2011-12. This was 14 times greater than the poorest fifth, who had an average income of £5,400.
Overall, taxes and benefits led to income being shared more equally between households. After all taxes and benefits were taken into account, the ratio between the average incomes of the top and the bottom fifth of households (£57,300 a year and £15,800 respectively) was reduced to 4:1.
The proportion of disposable income paid in indirect taxes increased across the income distribution in 2011-12 compared with the previous two years. This was largely explained by the increase in the standard rate of VAT in 2010 and 2011.
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.