Taxing wealth or income – looking at earnings
- rpwills
- 9 hours ago
- 2 min read
This post looks at the situation regarding earnings. All data is derived from the Office for National Statistics.
“In financial year ending (FYE) 2024:
Median equivalised household income in the UK before taxes and benefits was £38,900, increasing to £41,900 after taxes and benefits. The richest fifth of people's mean equivalised household income before taxes and benefits (£116,600) was 12.2 times larger than the poorest fifth (£9,600); however, this gap reduced to 3.3 times larger (£85,100 and £25,700, respectively) after all taxes and benefits.”
We can see from the data that although income tax is broadly progressive, other taxes are not. Although it appears that National Insurance is also progressive, when analysed in relation to income tax and NI combined,
it takes a larger share of the incomes of those on low incomes compared to those on higher incomes. Those in the bottom quintile pay more as a percentage of gross income for all other direct and indirect taxes.
Council tax and VAT are particularly noticeable in their impact on lower income individuals. In the bottom quintile council tax accounts for 5.7% of gross income while its only 1.5% for those in the top quintile. A similar situation arises with VAT. 9.6% of gross income for those in the bottom quintile but 3.7% for those in the top quintile.
Conclusion
Taxes on income impact disproportionately on lower income individuals. The question is therefore are reforms of the tax system relating to earnings required?.
Data
The table sets out the share of gross income accounted for by direct taxes and indirect taxes for the five income quintiles.
Percentages of gross income | Bottom | 2nd | 3rd | 4th | Top | All individuals |
Income Tax | 7.1 | 7.8 | 10.2 | 13 | 22.3 | 15.4 |
National Insurance contributions | 2.8 | 3.9 | 4.9 | 5.7 | 4.7 | 4.7 |
Council Tax and Northern Ireland rates | 5.7 | 3.8 | 3 | 2.4 | 1.5 | 2.5 |
Direct taxes | 15.7 | 15.7 | 18.2 | 21.3 | 28.8 | 22.9 |
Value Added Tax (VAT) | 9.6 | 7.1 | 5.6 | 5.2 | 3.7 | 5.2 |
Duty on alcohol | 1.1 | 0.7 | 0.6 | 0.5 | 0.5 | 0.6 |
Duty on tobacco | 0.9 | 0.9 | 0.5 | 0.4 | 0.2 | 0.4 |
Duty on hydrocarbon oils and Vehicle Excise Duty | 2.2 | 1.5 | 1.3 | 1.1 | 0.6 | 1.1 |
Other indirect taxes | 7.3 | 4.9 | 3.9 | 3.2 | 2.5 | 3.5 |
Indirect taxes | 21 | 15.1 | 11.9 | 10.4 | 7.5 | 10.7 |
All taxes | 36.7 | 30.7 | 30.2 | 31.7 | 36.2 | 33.6 |
Glossary
Equivalisation
Comparisons across different types of individuals and households or over time are made after income has been equivalised. Equivalisation is the process of accounting for the fact that households with many members are likely to need a higher income to achieve the same standard of living as households with fewer members.
Equivalisation considers the number of people living in the household and their ages, acknowledging that while a two-person household will need more money to sustain the same living standards as a single-person household, the two-person household is unlikely to need double the income.
For details of the methodology and sources of data used in the release from ONS, please visit the website.
Sources
Office for National Statistics (ONS), released 25 September 2025, ONS website, statistical bulletin, Effects of taxes and benefits on UK household income: financial year ending 2024. [Table 8: Taxes as a percentage of gross income, disposable income and expenditure for all individuals by equivalised household disposable income quintile group, UK, 2023/24.]
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