British income inequality falls as real wages grow for first time year since the 2008 global financial crisis

Tom Rees
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Real wages have been under pressure since the financial crisis (Source: Getty)

The gap between poorest and richest households in the UK is narrowing whilst the middle class is seeing its income squeezed, according to new data released by the Office for National Statistics.

The richest 20 per cent of households earned an average of £84,700 before taxes and benefits last year, 12 times the figure of the poorest fifth which earned £7,200.

Average income rises for the poorest in the UK meant that inequality fell in the last financial year compared to the previous year when the richest earned 14 times more. When taxes and benefits are factored in, the income gap between the top and bottom 20 per cent was reduced to a ratio of four to one.

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The ONS statistics showed that the poorest and richest saw their final incomes, which include taxes and benefits, rise by 4.3 per cent and 1.3 per cent over the last financial year that ended in March 2016, respectively, but middle class earners experienced falls of 1.2 per cent and 0.6 per cent in their final income, respectively.

According to the ONS study, in the financial year that ended last March real pay growth continued to rise after several years of real wages falling. Low inflation helped by the decline in oil prices and increases in nominal pay boosted household income which was in positive territory for the whole year for the first time since the 2008 financial crisis.

Although middle class final income fell last year, a study released today by the Pew Research Centre showed that in the UK the its disposable income growth in the 1990s and 2000s outstripped that of Germany, Italy and Spain. The research found that during the two-decade period UK middle class households saw their median income rise by 35 per cent and the size of the country’s middle class expanded by six percentage points.

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The ONS study also showed that whilst last year the poorest in the UK paid less direct tax, such as income tax and national insurance, as a percentage of their gross income, they did pay more on indirect tax such as duties on petrol, tobacco and alcohol.

The poorest spent more than a quarter per cent of their gross income on indirect taxes whilst the richest paid out just 14.4 per cent. This gap could widen further with chancellor Philip Hammond introducing a new sugar tax from April 2018 to combat obesity which is expected to impact the poorest disproportionately.

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