Benefits rise cushion UK households as income gap widens

The gap between Britain’s richest and poorest has widened, in part because benefits were frozen for four years and with the introduction of the benefit cap. However, millions of people 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) applicants are one of the few groups of people who are relatively immune to growing income inequality.

Over the past decade, the total income of the richest in the UK has grown by 0.9% per year after inflation, while the income of the poorest has fallen by 0.3% per year on average.

The richest fifth of households earned 12 times as much as the poorest (£ 107,800 versus £ 8,500) in the lead-up to the crisis.

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

“For those with the lowest incomes, small increases in benefits during the crisis may actually have improved their position,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.

“The benefit freeze and the cap had meant years of struggling with less, so the small bump in universal credit during the crisis will have eased the pressure slightly.”

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

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Despite Britain’s economic rebound and the success of the COVID vaccination program, there are concerns about the possibility that the UK government could target taxes to cover spiraling spending in the event of a pandemic.

This could range from increases in income tax to reduced benefits of tax relief for pensions. Meanwhile, the Office of Tax Simplification (OTS) has suggested in recent months to introduce wealth taxes to recover the funds.

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Despite this, Chancellor Rishi Sunak has so far resisted calls for a tax hike, but previously admitted that tough decisions may have to be made to tackle rising levels of public debt.

While Sunak announced an impending corporate tax increase for businesses during the March budget presentation, he said he would not increase income tax, national insurance or the VAT and freeze the personal tax threshold.

Coles added: “The real pain was reserved for those who work but have low incomes, especially those in industries that have been most dramatically affected by the virus – who may therefore have had to face time off or have their hours cut. Others will have lost their jobs, and may well have fallen into the bottom fifth of earners.

“For anyone in this role, it’s important to keep in mind the difference that taxation and benefits make. So if your circumstances have changed in the past year, it’s worth checking out. “the tax you pay and the benefits you receive. Make sure you are in as strong a position as possible.”

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