Universal Credit ‘small bump’ shields claimants as income gap worsens – earners struggle

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Income inequality has been examined today as the Government released data on the gap between incomes of the richest and poorest fifths of people in the UK. Hargreaves Lansdown (HL) examined these figures and noted the difference tax and benefits like Universal Credit makes.

HL, in breaking down the statistics, detailed:

  • The richest fifth of households earned more than 12 times more than the poorest (£107,800 compared with £8,500) in the period leading up to the pandemic.
  • Benefits and taxes cut the difference in total disposable income to four times (£75,600 and £18,600).
  • Inequality has widened over the past decade, partly because benefits were frozen for four years and the benefit cap introduced.
  • During the past ten years, the total income of the very richest in the UK rose 0.9 percent a year after inflation, while the income of the very poorest fell 0.3 percent a year on average.
  • The biggest contribution to inequality is indirect taxes. The poorest spent 33 percent of their disposable income on this and the richest spent 11 percent.

Sarah Coles, a personal finance analyst at HL, commented on these worrying figures.

She said: “After a decade of the rich getting richer and the poor getting poorer, millions of people were in a far weaker financial position even before the pandemic hit.

“A year on, there may have been slightly better news for the very poorest people in the UK.

“The real financial pain hit those earning slightly less than average.”

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Sarah went on to examine how Universal Credit claimants may have been able to avoid the worst of this.

She continued: “For those on the very lowest incomes, small boosts to benefits during the crisis may actually have improved their position.

“The benefits freeze and the cap had meant years of struggling by on less, so the small bump in Universal Credit during the crisis will have eased the squeeze slightly.

“There’s also likely to be a boost for the better paid. They’re more likely to have been able to work from home, so it was business as usual for their income.

“Meanwhile, an awful lot of them spent less and had holidays cancelled, so they may well have paid less in taxes like VAT.

“The real pain was reserved for those who are working but on lower incomes, especially those in industries that have been more dramatically affected by the virus – so may have faced furlough or had their hours cut.

“Others will have lost work, and may well have dropped into the bottom fifth of earners.

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

Many financial experts fear that, due to public debt levels, Rishi Sunak and the wider Government will have no choice but to target tax to cover coronavirus related costs.

This could range from increases to income tax to a reduction of pension tax relief perks.

Additionally, the Office of Tax Simplification has in recent months suggested wealth taxes be introduced to recoup the funds.

Despite this, the Chancellor has thus far resisted calls to increase taxes but he has acknowledged tough decisions may have to be made down the line.

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