Lowest earners lose 10% of salary to taxes

One in five of the poorest UK taxpayers are paying more than 10% of their salary on taxes such as income tax, National Insurance contributions and council tax, compared with top earners paying up to 23%

The latest ONS statistics show that the richest 20% of households paid nearly three times as much in indirect taxes, on average £9,700 per year compared with the poorest fifth who paid £3,500.

The top 20% of UK households earnt 12 times as much as the bottom 20% before taxes and benefits, but the poorest households paid more of their disposable income in indirect taxes.

The average income of the top earning households before taxes and benefits was £84,700 per year, compared to £7,200 for the poorest fifth. The tax-free allowance is £11,500 therefore lowest earners earning below the threshold would not be required to pay income tax.

On average, households paid £7,800 per year in direct taxes, equivalent to 18.7% of their gross income. Richer households pay higher proportions of their income in direct taxes than poorer households.

The top 20% paid, on average £20,100 per year, which corresponds to 23% of their gross income. The majority of this (16.5% of gross income) was paid in income tax. By contrast, the average tax bill for the bottom 20% was £1,600 per year, which is equivalent to 11% of their gross household income.

However, the poorest households paid more of their disposable income in indirect taxes (such as VAT and duties on alcohol and fuel), with the lowest income households losing 27% of their gross income compared to 14.4%. The ONS points out that therefore indirect taxes cause an increase in income inequality.

Overall, 50.5% of all households received more in benefits (including in kind benefits such as education) than they paid in taxes (direct and indirect). This is equivalent to 13.7 million households and continues the downward trend seen since the financial year ending 2011.

Despite being less progressive than many of the other benefits, the State Pension has consistently made the largest contribution to the overall progressivity of cash benefits over the past 22 years.

The ONS says that across the board, VAT is the largest component of indirect taxes. Again, the proportion of disposable income that is spent on VAT is highest for the poorest fifth and lowest for the richest fifth.

However, after indirect taxes, the richest fifth had post-tax household incomes that were six times those of the poorest fifth (£57,800 compared with £9,600 per year, respectively). 

The ONS statistical bulletin, Effects of taxes and benefits on UK household income: financial year ending 2016 is here.

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