Top fifth 4 times better off than bottom fifth

In 2001-02, the original income of the top fifth of households in the UK was around eighteen times greater than for those in the bottom fifth (£62,100 per household per year compared with around £3,400).

After adjusting for taxes and benefits, the ratio was greatly reduced, to four to one for final income, unchanged from 2000-01.

The types of households that gain from this redistribution of income tend to be one-adult households with children, two-adult households with three or more children, and retired households.

Households can receive two kinds of benefits – cash benefits and benefits in kind.

Cash benefits play the largest part in reducing inequalities. They make up about two thirds of gross income for the poorest fifth of households and two fifths for the next group. Examples of cash benefits are Income Support, Child Benefit, Incapacity Benefit and Working Families Tax Credit.

Benefits in kind are health services and education. The amount of benefits in kind received by households reflects the number of household members and their age and sex. The amount that a household receives in the form of both types of benefits falls as income increases.

With the exception of local taxes, direct taxation is progressive; that is it takes a larger proportion of income from those households that have higher gross incomes. In 2001-02, the top fifth of households paid 24 per cent of their gross income in direct tax while the bottom fifth paid 12 per cent.

Although taxes contribute to a reduction in inequality they do not do so to the same extent as benefits. Indirect taxes, such as VAT, have the opposite effect to direct taxes, taking a higher proportion of income from those with lower incomes.