Benefits increase cushions British households as income gap widens

Close up of hand of woman taking out pounds from her purse
The biggest contribution to inequality was indirect taxes, with the poorest spending 33% of their disposable income on this while the richest spent 11%. Photo: Getty

The gap between Britain's wealthiest and poorest has widened, partly because benefits were frozen for four years, and with the introduction of the benefit cap. However, millions were in financial difficulty even before the coronavirus pandemic hit, official figures show.

According to data from the Office for National Statistics (ONS), Universal Credit (UC) claimants are one of the few groups of people to be relatively shielded from widening income inequality.

In the last decade, the total income of the UK's richest rose 0.9% a year after inflation, while the income of the poorest dropped 0.3% a year on average.

The richest fifth of households earned over 12 times more than the poorest (£107,800 compared with £8,500) in the period leading up to the crisis.

However, taxes and benefits cut the difference in total disposable income to four times — £75,600 ($107,276) and £18,600, respectively.

"For those on the very lowest incomes, small boosts to benefits during the crisis may actually have improved their position," said Sarah Coles personal finance analyst at Hargreaves Lansdown.

"The benefits freeze and the cap had meant years of struggling by on less, so the small bump in Universal Credit during the crisis will have eased the squeeze slightly."

The ONS found the biggest contribution to inequality was indirect taxes, with the poorest spending 32.9% of their disposable income on this while the richest spent 11.4%.

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Despite Britain's economic rebound and successful COVID vaccine programme, there are some concerns over the possibility that the UK government could target tax to cover spiralling pandemic spending.

This could range from increases to income tax to a reduction of pension tax relief perks. Meanwhile, the Office of Tax Simplification (OTS) has in recent months suggested wealth taxes be introduced to recoup the funds.

Despite this, chancellor Rishi Sunak has so far resisted calls to increase taxes but has previously admitted tough decisions may have to be made down the line to combat rising public debt levels.

While Sunak announced a looming increase in corporation tax for businesses when he delivered the March Budget, he said he will not raise income tax, national insurance or VAT, and will freeze the personal tax threshold.

Coles added: "The real pain was reserved for those who are working but on lower incomes, especially those in industries that have been more dramatically affected by the virus – so may have faced furlough or had their hours cut. Others will have lost work, and may well have dropped into the bottom fifth of earners.

"For anyone in this position, it’s important to bear in mind the difference that tax and benefits make a to the picture. So if your circumstances have changed over the past year, it’s worth checking the tax you pay and the benefits you receive to make sure you’re in as strong a position as possible.”

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