ECO14The Distribution of Income and Wealth

• Income is a flow of money received over a period of time: wages and salaries, interest on savings, dividends from shares, rent, pensions and benefits.
• Wealth is a stock of assets owned at one point in time: money in the bank, a house, shares, a pension fund, a business.
• They feed each other: income that isn't spent can be saved and builds wealth; wealth earns income (interest, rent, dividends).
• Income inequality: income is shared unequally between people or households.
• Wealth inequality: assets are shared unequally. In the UK, wealth is far more unequal than income.
• Inequality is not the same as poverty. Inequality is about the gap between people; poverty is about having too little to meet needs.

Income flows in; wealth is the stock that builds up

Income

A flow of money received over time, such as wages, interest, dividends, rent or benefits.

Wealth

A stock of assets owned at a point in time, such as savings, property and shares.

Income inequality

An unequal distribution of income across the economy.

Wealth inequality

An unequal distribution of assets across the economy.

• Quintiles: rank all households by income and split them into five equal groups (fifths). Comparing the share of total income going to the top and bottom fifths shows how unequal income is.
• Original v final income: taxes, cash benefits and free services such as the NHS and schools narrow the gap. Final income is much less unequal than income before government steps in.
• Income, UK: the Gini coefficient for disposable household income was 32.9% in the financial year ending 2024 (ONS). It runs from 0% (everyone has the same income) to 100% (one household has it all). You don't need to calculate it.
• Low income: in the financial year ending 2025, 16% of people lived in households with relative low income before housing costs, and 20% after housing costs. For children the figures were 21% and 27% (DWP, March 2026). Relative low income means below 60% of the middle (median) income.
• Wealth, Great Britain: between April 2020 and March 2022, the wealthiest 1% of households held about 10% of all wealth, roughly as much as the least wealthy 50% put together (ONS).
• Last checked: November 2026. Official inequality figures come out a year or more after the period they cover.

Taxes, benefits and free services narrow the gap between the richest and poorest fifths (invented data)

Quintile

One fifth (20%) of households when they are ranked by income.

Gini coefficient

A measure of inequality from 0% (complete equality) to 100% (one household has everything).

Relative low income

Household income below 60% of the median (middle) income.

• Wage differentials: pay differs between jobs because of skills, qualifications, experience, and the demand for and supply of workers (see The Labour Market).
• Education and training: people with scarce, high-level skills tend to earn more.
• Unemployment and hours: people out of work, or in part-time or insecure jobs, earn less than full-time workers.
• Income from wealth: people who own shares, property or savings receive dividends, rent and interest on top of pay.
• Age and stage of life: earnings usually rise with experience, then fall in retirement.
• Region: pay tends to be higher in London and the South East than in many other regions.
• Discrimination can mean some groups are paid less or overlooked for promotion, even though it is against the law.
• Tax and benefit design: changes to tax rates, allowances and benefits can widen or narrow the gap.

Wage differential

The difference in pay between workers, jobs or regions.

• Inheritance: wealth passed down through families gives some people a large head start.
• House prices: when house prices rise, homeowners become wealthier, while renters gain nothing and find it harder to save a deposit.
• Ability to save: people with high incomes can save more, so their wealth grows; people on low incomes may spend everything they earn.
• Returns on assets: shares, property and savings earn returns, so wealth grows on itself. If returns grow faster than wages, the gap widens.
• Pensions and age: older people have had longer to pay off a mortgage and build up a pension.
• Business ownership: owning a successful firm can create great wealth.
• This is why wealth is more unequal than income: differences in income build up over many years and pass between generations.

Inheritance

Money or property passed on when someone dies.

Asset

Something of value that a person owns, such as a house, shares or savings.

• Poverty: people at the bottom may be unable to afford a decent standard of living.
• Health: people on low incomes tend to have poorer health and shorter lives, which also raises demand on health services.
• Education and social mobility: children from poorer families may have fewer chances, so talent is wasted and inequality passes to the next generation.
• Social tension and crime: large gaps can cause resentment and weaken trust.
• Spending in the economy: people on low incomes spend a bigger share of their income, so a shift of income to the very rich can mean less spending overall.
• Cost to government: more spending on benefits and services, and less tax collected.
• The other view: some economists argue that some inequality gives incentives to work hard, train, take risks and start businesses. Some also argue that wealth created at the top ‘trickles down’ through jobs and spending. Critics say there is little evidence that it trickles down much.

Social mobility

How easily people can move up (or down) the income ladder compared with their parents.

Incentive

Something that encourages people to act, such as higher pay for extra work.

• Redistribution: the government takes from people with higher incomes or wealth (taxes) and gives to people with less (spending), narrowing the gap.
• Progressive income tax: people on higher incomes pay a larger proportion of their income in tax (see Taxation, Government Spending and Fiscal Policy for the bands).
• The tax-free Personal Allowance: the first £12,570 of income is tax-free in 2026–27 (England, Wales and Northern Ireland). Raising it takes more low earners out of income tax. The allowance is frozen until April 2031 (Budget 2026). Last checked: November 2026.
• Inheritance tax: a tax on large estates when someone dies. It is the main tax aimed at wealth passing between generations.
• Capital gains tax: a tax on the profit made when assets such as shares or second homes are sold.
• Cutting regressive taxes such as VAT on essentials helps low-income households most, because those taxes take a larger share of their income.

Income tax takes a larger share as income rises; VAT tends to take a smaller share

Redistribution

Moving income or wealth from better-off people to worse-off people, through taxes and government spending.

Personal Allowance

The amount of income a person can earn before paying income tax (£12,570 in 2026–27).

Inheritance tax

A tax on the value of a large estate passed on when someone dies.

Capital gains tax

A tax on the profit made from selling an asset that has risen in value.

• Welfare benefits: cash payments to people on low incomes, out of work, disabled or caring for others. Means-tested benefits go only to people whose income or savings are below a limit.
• State pension: a regular payment to people above the state pension age.
• Free public services (benefits in kind): healthcare, schools, free school meals and some childcare. These are worth most, as a share of income, to low-income households.
• Education and training: help people gain skills and earn more in the long run, so they tackle a cause of inequality, not just the result.
• Housing support: help with rent or social housing.
• The National Living Wage (a law, not spending): a minimum hourly rate of £12.71 for workers aged 21 and over from April 2026, with £13.21 announced for April 2027. It raises pay at the bottom (see The Labour Market).

Welfare benefits

Payments from the government to people who need support, such as those on low incomes or out of work.

Means-tested benefit

A benefit paid only to people whose income or savings are below a set level.

Benefits in kind

Free services rather than cash, such as healthcare and education.

• Incentives to work: critics argue that high tax rates reduce the reward for working longer, training or taking a promotion. Supporters reply that most people's choices are affected only a little.
• The benefit trap: if benefits are withdrawn quickly as earnings rise, a person may gain little from working more hours.
• Incentives to invest: high taxes on profits, capital gains or inheritance may discourage saving, investing and building family businesses.
• Avoidance and moving abroad: wealthy people and firms may use legal loopholes or move to lower-tax countries, so less tax is raised than expected.
• Cost and opportunity cost: benefits and services must be paid for by taxes or borrowing, and money spent here can't be spent elsewhere.
• Targeting: help that goes to everyone (universal) is simple but goes to some who don't need it; means-tested help is targeted but some people who qualify don't claim it.
• Time lags: education and training reduce inequality only over many years.

Benefit trap

When losing benefits as income rises leaves a person little better off for working more.

Tax avoidance

Legally arranging affairs to pay less tax.

Universal benefit

A benefit paid to everyone in a group, whatever their income.

• Ask three questions: Does it reach the people it is aimed at? What does it cost, and who pays? What does it do to incentives?
• Income or wealth? Most policies work on income. Fewer reach wealth, which is more unequal.
• Short run or long run? Benefits help at once; education helps over decades.
• People disagree about how much inequality is acceptable and how far the government should go. That is a question of values, so a good answer weighs the evidence and reaches a supported judgement.

Targeting

How well a policy reaches the people it is meant to help.