Wealth rise boosts unequal Britain

By Steve Schifferes
Economics reporter, BBC News

More than 3.8m children still live below the poverty line

The rapidly rising incomes of the richest 10% of the population are the major factor contributing to growing inequality in Britain.

According to the Institute for Fiscal Studies (IFS), an independent think tank, the incomes of the top 10% have risen faster than those of the population as a whole since Labour came to power in 1997.

And that increase has been particularly concentrated at the very top of the income distribution - among the half million individuals in the top 1% of the income scale.

WHO ARE THE VERY RICH? Male: 90% Middle-aged: 80% Live in London/SE: 70% Work in finance, property, accountancy, law: 60% Average income: £785,000 Source: IFS, top 0.1% of GB taxpayers, 2004/5

According to the IFS's Mike Brewer, it is this growing disparity between those at the top and bottom of the income scale that explains why inequality has not changed under Labour.

"It seems there are two interesting phenomena, at either end of the income scale, that are driving trends in overall income inequality," he said.

Between the 1996-97 tax year and 2004-05, the income of the richest 1% grew at an annual rate of 3.1%, compared to 2.3% for the population as a whole, and the income of the top 0.1% grew by 4.4%.

The stock market boom has boosted the income of the rich

The growth was particularly strong in the Labour's first term, where the income of the super-rich grew by 8% per year.

The IFS suggests that the rising stock market between 2005 and 2007 may have further boosted the income of the rich - a view confirmed by the 20% increase in the wealth of those in the Sunday Times rich list in 2007.

In contrast, those at the bottom of the income distribution - and especially the poorest 15% of households - saw their income go up at below-average rates, and in some cases even fell.

See how incomes of rich and poor have grown

Inequality

Incomes for those individuals in the middle of the income distribution have risen at broadly the same rate compared to one another, with those at the lower end gaining slightly.

But overall, the gap between the bottom 10% and the top 10% has widened.

The top 10% of individuals in the UK now receive 40% of all personal income, while the bottom 90% receive 60%.

The top 0.1% get 4.3% of all income - the highest figure in the UK since the 1930s, and three times as much as they received as a share of income in 1979.

Overall, inequality rose sharply between 1979 and 1990, and then levelled off before increasing more slowly to reach a record high by 2001, and return to that level in 2006.

The report says that "income inequality is at its highest level since the late 1940s".

However it adds: "Even if we are more unequal now than we were in the 1940s, we are almost certainly better off in absolute terms."

Who are the rich?

The report gives some surprising details of income in Britain today.

The average income of the top tenth, of £49,950, was double the average income of all taxpayers (£24,769) and triple that of all households (£15,000), one-third of whom pay no tax.

To get into the top 1%, an individual needed an income of £100,000, and to get into the top 0.1%, £350,000.

Those in the top 1% of the income distribution had an average income of £155,000, while the top 0.1% of taxpayers had an average income of £780,000.

Not all of the UK's rich have their wealth in Great Britain

The very rich are disproportionately male, middle-class and live in London and the South-East.

They largely work in the financial sector, property and law, although 15% of those in the top 1% were doctors.

And they have significantly more income from investments and self-employment - around 40% - compared to the rest of the population.

According to IFS figures, anyone with an income of over £35,000 per year before tax was in the top 10% of taxpayers.

The survey evidence used by the IFS (based on HMRC tax returns) may also have missed some of the rich - those who are non-domiciled, for example (like some of the richest UK residents), or those who do not declare fully their income.

Poverty and wealth

The rich also pay more tax than the rest of the population, although even those at the very top pay income tax at a rate of 35%, compared to 21% for the top 10% and 17.8% for all taxpayers.

Sunday Times Rich List 2007 1. Lakshmi Mittal...£19.2bn 2. Roman Abramovich..£10.8bn 3. Duke of Westminster...£7bn 4. Sri & Gopi Hinduja...£6.2bn 5. David Khalili...£5.8bn 6. Hans Rausing....£5.4bn 7. Sir Philip and Lady Green..£4.9bn 8. John Fredriksen...£3.5bn 9. David and Simon Reuben..£3.4bn 10. Jim Ratcliffe...£3.3bn source: Sunday Times

This is because much of the income of the rich is paid at a lower rate, for example in capital gains tax, or it is subject to a tax deduction, for example contributions to pension schemes.

The top tax rate has stayed at 40% for the last 20 years, and currently no political party is proposing any chance.

It is also unclear how much an increase in the tax rate, for example to 50% for those earning over £100,000, would actually yield.

If tax rates went up, it is possible that the rich could change the way they received their income - or where they lived - in order to limit any gains for the Exchequer

However, the IFS point out that since the rich represent such a large proportion of income tax, if their income started to stagnate - for example as a result of another stock market fall - it would be bad news for government tax revenues.

That in turn could make it harder for the government to meet its key poverty target - of reducing the rate of child poverty by half by 2010.

Recent figures showed that the government was still far from that target, and recent report from the Joseph Rowntree Foundation suggested that one-third of all children are still in poverty, and that the number had increased in the last year.

return to top

The IFS data is based on the Survey of Personal Incomes, or SPI, a sample of tax returns made every year by HMRC, with a sample size of 550,000. For reasons of comparison, the figures include England, Scotland, and Wales, but exclude Northern Ireland.