Top fifth 4 times better off than bottom fifth
Average income per household, 2003-04, United Kingdom
In 2003-04, the original income (before taxes and benefits) of the top fifth of households in the UK was around 17 times greater than that for the bottom fifth (£63,200 per household per year compared with £3,700). This ratio is similar to those of the previous two years (15 to one in 2002-03 and 18 to one in 2001-02).
After adjusting for taxes and benefits this ratio was reduced to four to one for final income, unchanged from previous years.
The types of households that gain most from this redistribution of income are single adult households with children, and retired households.
Cash benefits such as Income Support, Child Benefit, Incapacity Benefit, and the state Retirement Pension play the largest part in reducing income inequality. They predominantly go to households with lower incomes. Cash benefits make up 61 per cent of gross income for the poorest fifth of households, 37 per cent for the next group, falling to 2 per cent for the top fifth of households.
With the exception of Council tax and Northern Ireland rates, direct taxation is progressive; that is it takes a larger proportion of income from those households that have higher gross incomes. In 2003-04, the top fifth of households paid 25 per cent of their gross income in direct tax while the bottom fifth paid 10 per cent.
Indirect taxes have the opposite effect, taking a higher proportion of income from those with lower incomes. For the top fifth of households, indirect taxes account for only 11 per cent of gross income, compared to 28 per cent for the bottom fifth. Overall, taxes have much less effect on income inequality than benefits.
Final income includes an adjustment for the receipt of benefits in kind from the state, such as health and education services. Households with lower incomes tend to receive more benefits in kind from the state. Retired households and households with children, which are more likely to be in lower income groups, are the biggest users of state health and education services.
Source: Office for National Statistics
Households are ranked by equivalised disposable income.