Driving down inequalities

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The Issues

Income inequality in the UK

The UK has one of the highest levels of income inequality in Europe. There was a sharp increase in all measures of economic inequality over the course of the 1980s. Measured by the commonly-used Gini coefficient, relative income inequality has stayed largely flat since 2000. But this means that the real income gap between richer and poorer households has been increasing in absolute terms.

Other measures of income inequality show a continuing rise over the same period. Between 2003-4 and 2018-19, the poorest 20% of non-pensioner households saw no overall rise in their incomes at all, while the incomes of the richest tenth and of the median (typical) household grew around 15%. The poorest fifth did see their incomes rise in 2019-20, but this will almost certainly have been reversed in 2020-21. In this period pensioner poverty has fallen, though it rose to just under a fifth (18%) in 2019-20, while the proportion of children living in poverty has increased to nearly a third (31%).

The Gini coefficient also hides the accelerating incomes of the richest 1%, who now take almost 14% of all national income, compared to around 7% in 1981.

Wealth inequality

Wealth is far more unevenly distributed than income. In 2016-2018 the wealthiest 12% of households owned half of the UK's wealth, while the least wealthy 30% of households held just 2%. The poorest tenth of the households have negative wealth: that is, their debts exceed their assets. Measured by the Gini coefficient, wealth inequality has increased since 2006-8, with financial and property wealth showing the largest rise.

Pension wealth has become more equal in this period, as automatic pension enrolment has been rolled out. The rise in property values has led to a sharp increase in intergenerational inequality. For the most part, income and wealth are closely linked, with high incomes allowing people to accumulate assets, which have consistently grown faster in value than national income over recent decades. The poorest households most exposed to income shocks often have no savings to fall back on.

One consequence is the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade, and the increasing use of food banks.

Inequality and Covid-19

The impacts of the Covid-19 pandemic and economic shutdowns have not been evenly experienced. The evidence shows that the effects have largely played out along existing lines of inequality. In the UK people living in the most deprived areas and on the lowest incomes, and those from black and minority ethnic (BME) communities, have been both most likely to die from the disease and most likely to lose their jobs and to face serious financial pressure.   

Globally Covid has also been experienced in very uneven ways. Varying national responses to the virus have made a big difference, but within most countries it has been those on the lowest incomes who have experienced the most severe effects, and internationally countries with the poorest health systems.

The extremely unequal distribution of vaccines has exacerbated the crisis, with much slower rates of vaccination between richer and poorer countries. Vaccination rates will largely determine how quickly countries recover economically from the pandemic.

In Depth

Gender inequality

The pandemic has sharpened the pre-existing economic disparity between men and women. Women are more likely to have lost work and income. They are also more likely to work in low-paid, insecure frontline roles. Women continue to do most childcare, housework and caring for others.
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In Depth

Racial inequality and migration

Black and minority ethnic (BME) residents of the UK have been disproportionately affected by the pandemic. They have suffered worse health outcomes, while long-standing economic inequalities between white and BME Britons have been exacerbated by the downturn.
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Reducing income and wealth inequality

The multiple drivers of income and wealth inequality mean that many different kinds of policies and approaches are needed to reduce them. One of the core features of the growth of inequality in most high-income countries since the 1970s is the significant fall in the proportion of national income which has gone to wages and salaries (the 'labour share') and the corresponding rise in the proportion which has gone to the owners of capital assets (such as company shares and land and property). This suggests that policy needs to focus, on the one hand, on raising the productivity of labour and the bargaining power of workers; and on the other on reducing the rate at which assets appreciate in value. Both kinds of approach would reduce the growth of 'market' income and wealth, before tax. Reforms to the tax system and welfare measures can then further reduce inequality.

In recent years the growth of low-paid and insecure jobs has led many to argue that there needs to be a revival of the role of trade unions in the labour market, able to bargain collectively on behalf of workers and employees. There is a strong correlation between the decline of union membership in most high-income countries since the 1970s and the rise of income inequality. Productivity improvement - for example through automation - will enhance wages, but only if the benefits are shared between workers and the owners of the automating technologies and software.

Over recent decades there has been an increasing concentration in the ownership of company shares, and the values of stocks and real estate have grown substantially faster than national income (GDP). Companies have become more 'financialised', using more of their profits for dividends and less for investment, and and banks (particularly in the UK and US) have lent increasing sums for land and property. Various proposals have been made to counter these trends, including stronger financial regulation, higher taxation of financial companies and transactions and new forms of corporate governance. There have also been proposals to widen the ownership of company shares, both to their workers and the population as a whole.

Wealth taxation

The wide disparities in the distribution of wealth have led to an emerging consensus that the way in which wealth is taxed needs to be reformed. While wealth has soared relative to incomes over recent decades, with these gains concentrated very narrowly among high-income households, the tax take from wealth has remained flat.

Property wealth constitutes an important part of this. House prices in the UK have tripled relative to incomes since the 1970s, a key driver of economic inequality. But soaring property values have been left largely untaxed, with a council tax system still based on 1991 property values. Economists point out that land and property taxation is an efficient mechanism since they are fixed and their rise in value often occurs without any work, effort or skill on the homeowners’ part

Income from wealth , including dividends and capital gains, is currently taxed at lower rates than income from work, one reason why the very wealthy pay a much lower effective average rate of tax on their remuneration. The system of inheritance tax includes a range of reliefs and exemptions, which can allow the wealthiest estates to avoid it: the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2-3 million. Tax avoidance schemes also allow the very wealthiest to circumvent tax. Among the wealthiest 0.01% of household, who hold 5% of national wealth, approximately 30-40% of wealth is held offshore.

Proposals for tax reform include equalising the rates of tax on income from wealth and income from work; reforming land and property taxation; reforming inheritance tax; and proposals for annual or one-off taxation of household wealth.

Regional inequality

The UK is more geographically unequal than any other comparable advanced economy. This regional inequality exists across output, income, productivity, employment, and political power. 

The UK has long suffered from regional health inequalities. Even before Covid-19 people in the most deprived areas could expect to live 19 fewer years in good health than those in the richest parts of the country. The death rate from Covid-19 in the UK’s poorest regions was over double the rate in the wealthiest.

The economic fallout of Covid-19 could increase regional inequalities, with London and the Southeast experiencing smaller reductions in hours worked during the pandemic. But the increase in working from home, if continued, could benefit smaller towns, and rural and coastal areas, if firms and employees realise they do not need to be located in major cities.