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Disposable Income

Volume 458: debated on Wednesday 14 March 2007

To ask the Chancellor of the Exchequer how much and what proportion of disposable income was paid on average in (a) direct taxes, (b) indirect taxes by (i) working age households with dependent children, (ii) working age households without dependent children and (iii) pensioner households in each of the last three years, broken down by income decile. (126508)

The information requested falls within the responsibility of the National Statistician, who has been asked to reply.

Letter from Karen Dunnell, dated 14 March 2007:

As National Statistician, I have been asked to reply to your recent Parliamentary Question asking how much and what proportion of disposable income was paid on average in (a) direct taxes, (b) indirect taxes by (i) working age households with dependent children, (ii) working age households without dependent children and (iii) pensioner households, broken down by income decile in each of the last three years. (126508)

Estimates of the proportion of income paid in both direct and indirect taxes appear in the ONS analysis ‘The effects of taxes and benefits on household income’. The latest analysis for 2004/05 was published on the National Statistics website on 12th May 2006 at http://www.statistics.gov.uk/taxesbenefits. The analysis is based on data from the Expenditure and Food Survey (EPS), which is a sample survey covering approximately 7,000 households in the UK. The analysis for 2005/06 will be published on the National Statistics website on 17 May 2007.

The tables below show the amount of direct and indirect taxes paid by each of the three different types of household. They also show the average payment of direct and indirect taxes as a proportion of income. However, since disposable income is that received after the payment of direct taxes, the proportion of disposable income paid in direct taxes is zero by definition. So only indirect taxes are shown as a proportion of disposable income. To enable a comparison, both direct and indirect taxes have been shown as a proportion of gross income.

Figures have been provided for the last three years, and they have been taken from (or calculated from) figures appearing in the three most recent ‘effects of taxes and benefits’ articles, those for 2002/03, 2003/04, and 2004/05. The figures for non-retired households with children have been taken from Table 21, the figures for non-retired households without children from Table 20, and the figures for retired households from Table 18. Retired households are those where the income of retired household members accounts for more than half of the household gross income.

Direct taxes include income tax, national insurance contributions and council tax. The indirect taxes include VAT, duties, intermediate taxes (see background notes), and a number of smaller items such as television licences.

When comparing estimates over these three years, it should be remembered that the estimates are based on a sample, and that there is some uncertainty around the estimates. While there will have been some changes in the taxes paid by households over this period, the underlying changes are difficult to distinguish from the movements arising from sampling error, especially in the figures for decile groups. Given this, these figures are best interpreted as indicating the average level of tax payments over this three year period, rather than interpreting them as measuring how the tax burden has changed over these three years.

There was a change to the way that tax credits were treated from 2003/04 onwards. Up until 2002/03 tax credits were treated as cash benefits. From 2003/04, they are classified as negative income tax, but only to the extent that income tax less tax credits, remains greater than or equal to zero for each family. So for households paying relatively little or no income tax, tax credit payments were still regarded either partially or wholly, as cash benefits. Based on figures for 2003/04, the effect of this change was to reduce the overall estimate of direct taxes as a proportion of gross income for all households, by 0.3%.

Indirect taxes, when expressed as a proportion of either gross or disposable income appears particularly high for the bottom income decile, although this result needs to be interpreted carefully. Estimates of indirect taxes are estimated based on household expenditure. It should be remembered that measured expenditure will not necessarily balance with measured income for the year. This is especially true for the bottom income decile where average measured income is significantly lower than average expenditure. For these households, indirect taxes (which reflect expenditure) are not being met solely from current income, and so indirect taxes are very high when expressed as a proportion of either gross or disposable income.

There are a number of plausible reasons why for some households, expenditure might exceed income. Households with low incomes may draw on their savings or borrow in order to finance their expenditure. In addition, the lower decile in particular includes some groups, who have, or report, very little income (for example, self-employed people starting a business or someone who has just been made redundant). In these cases, expenditure is not being met from current income. Some types of receipts are not included as income in the EFS e.g. inheritance and severance payments. In some cases, the information given on expenditure is not consistent with that on income received because of timing differences.

Table 1: Direct and indirect taxes paid by non-retired households with children by decile group, 2002-03 to 2004-05

Decile groups of all non-retired households with children ranked by equivalised disposable income

Bottom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

All households

Average per household (£ per year)

Direct taxes

2002-03

826

1,426

2,038

3,398

4,629

5,840

7,588

9,728

12,456

23,632

7,156

2003-04

787

1,410

2,514

3,644

5,002

6,421

7,977

9,798

13,265

25,471

7,629

2004-05

910

1,517

2,908

3,876

5,197

6,492

8,271

10,088

14,220

27,420

8,090

Indirect taxes

2002-03

3,565

3,638

3,808

4,449

4,906

5,107

6,114

6,643

7,205

9,492

5,493

2003-04

3,301

3,755

4,518

4,948

5,662

6,089

5,963

6,942

7,423

9,538

5,814

2004-05

3,781

3,987

4,316

5,078

5,571

5,872

6,717

6,756

7,631

9,856

5,957

Percentages of gross income

Direct taxes

2002-03

8

9

11

15

17

19

20

21

22

25

20

2003-04

7

9

12

14

17

19

21

22

24

25

20

2004-05

7

9

13

15

17

19

20

21

23

26

20

Indirect taxes

2002-03

32

24

21

20

18

16

16

15

13

10

15

2003-04

31

24

22

19

19

18

15

16

13

9

15

2004-05

31

23

20

19

19

17

16

14

13

9

15

Percentages of disposable income

Indirect taxes

2002-03

35

27

24

23

22

20

20

18

17

14

19

2003-04

34

26

25

23

23

22

19

20

17

12

19

2004-05

34

25

23

23

22

21

21

18

16

13

19

Table 2: Direct and indirect taxes paid by non-retired households without children by decile group, 2002-03 to 2004-05

Decile groups of all non-retired disposable income households without children ranked by equivalised disposable income

Bottom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

All households

Average per household (£ per year)

Direct taxes

2002-03

660

1,698

3,204

4,453

5,326

6,976

7,999

9,842

11,732

19,880

7,177

2003-04

981

1,587

3,129

4,499

5,662

7,373

8,750

10,168

12,261

22,865

7,728

2004-05

1,055

2,292

3,986

5,115

6,286

8,008

9,391

10,951

13,576

22,907

8,357

Indirect taxes

2002-03

3,010

3,069

3,796

4,411

4,734

5,240

5,358

5,879

6,841

7,472

4,981

2003-04

2,775

3,230

3,695

4,263

4,673

5,185

5,392

5,908

6,051

7,872

4,904

2004-05

3,010

3,740

4,229

4,421

5,097

5,577

5,502

5,974

6,474

8,211

5,223

Percentages of gross income

Direct taxes

2002-03

11

13

17

19

19

21

22

22

23

25

21

2003-04

14

12

17

19

21

22

23

24

25

26

23

2004-05

12

15

18

20

21

22-

23

24

25

25

23

Indirect taxes

2002-03

48

23

20

19

17

16

15

13

13

9

15

2003-04

40

25

20

18

17

16

14

14

12

9

14

2004-05

35

24

19

17

17

16

14

13

12

9

14

Percentages of disposable income

Indirect taxes

2002-03

54

26

24

23

21

20

19

17

17

12

19

2003-04

47

29

25

22

22

20

18

18

16

12

19

2004-05

40

29

24

22

21

20

18

17

16

12

18

Table 3: Direct and indirect taxes paid by retired households by decile group, 2002-03 to 2004-05

Decile groups of all retired households ranked by equivalised disposable income

Bottom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

All households

Average per household (£ per year)

Direct taxes

2002-03

632

701

754

617

810

1,021

1,358

1,848

2,650

6,655

1,705

2003-04

712

687

867

873

770

1,231

1,628

2,181

2,856

6,687

1,849

2004-05

901

726

903

908

825

1,202

1,473

2,062

2,894

6,128

1,802

Indirect taxes

2002-03

1,761

1,832

2,021

1,856

2,190

2,129

2,557

2,981

3,119

4,360

2,481

2003-04

1,830

1,601

2,291

2,008

2,051

2,570

2,745

3,228

2,973

4,812

2,611

2004-05

1,908

1,958

2,167

2,147

1,930

2,517

2,552

2,692

3,362

4,770

2,600

Percentages of gross income

Direct taxes

2002-03

10

8

8

6

7

8

9

11

13

18

12

2003-04

11

8

9

8

7

9

10

12

14

19

12

2004-05

14

9

9

8

7

9

10

11

13

17

12

Indirect taxes

2002-03

29

21

21

18

20

17

18

18

15 .

12

17

2003-04

29

20

23

19

18

19

18

18

14

13

17

2004-05

29

23

21

19

17

19

17

15

16

13

17

Percentages of disposable income

Indirect taxes

2002-03

33

23

22

19

22

18

20

20

17

14

19

2003-04

32

21

25

20

20

21

20

20

17

17

20

2004-05

34

25

24

20

18

21

19

17

18

16

19