Lowest inequality since 1986 as high incomes fall

THE GAP between the largest and smallest incomes in the UK narrowed to its closest level for a quarter of a century in the 2011-12 financial year, the Office for National Statistics (ONS) announced yesterday.

The rising level of equality has been attributed to the highest salaries falling, and changes to the tax system.

The richest fifth of households saw their average disposable income drop by £4,200, 6.8 per cent, between 2007-08 and 2011-12. In comparison, the average income for the poorest fifth has risen by 6.9 per cent, or £700 in the same period.

The Gini coefficient, a common measure of how equal or unequal incomes are, stood at 32.3 per cent in 2011-12, down from 33.7 per cent in the previous year.

The changes to the tax system which are credited with reducing inequality include a higher personal income tax allowance, pushed by the Liberal Democrats, and changes to national insurance and child tax credits.

Before the tax and benefit system is taken into account, the highest-earning 20 per cent of people have incomes 14 times larger than the worst off 20 per cent. However, tax and welfare close the gap considerably. After both are taken into account, the UK’s richest fifth only earn four times as much.

The richest fifth of households pay an average of £19,900 in direct taxes, while the same bill for the poorest fifth is only £1,300. There are also differences in which taxes pose the biggest burden. Low earners shell out more on council tax, but the richest are hit most by taxes on income.

Once direct taxation is taken into account, the fifth of the country earning the lowest wages actually hands over the highest proportion of their income to the treasury, forking out 36.6 per cent. In comparison, the top fifth pay 35.5 per cent.