Impact of indirect taxes
The amount of indirect tax (such as VAT, and duties on alcohol and fuel) each household pays is determined by their expenditure rather than their income. The richest fifth of households paid two and a half times as much indirect tax as the poorest fifth (£8,700 and £3,400 per year, respectively). This reflects higher expenditure on goods and services subject to these taxes by higher income households. However, although richer households pay more in indirect taxes than poorer ones, they pay less as a proportion of their income. This means that indirect taxes act to increase inequality of income.
In 2011/12, the bottom fifth of households paid 29% of their disposable income in indirect taxes, compared with 14% for the richest fifth. These proportions have increased over the last two years, from 27% and 12% respectively, in 2009/10. The rise in the proportion of income paid in indirect taxes over this time period is largely explained by the increases in the standard rate of VAT from 15.0% to 17.5% on 1 January 2010 and 20.0% on 4 January 2011, which have contributed to an increase in the average amount paid in VAT across all income groups. The VAT increases will also have impacted on inflation rates in these years.
When expressed as a percentage of expenditure, the proportion paid in indirect tax declines less sharply as income rises. The bottom fifth of households paid 21% of their expenditure in indirect taxes compared with 17% for the top fifth. The figure for the top fifth is a slight increase on last year, when the proportion was 16%, while the figure for the bottom fifth is broadly unchanged.