Wealth and Income



An inward flow of money that is received on a monthly or yearly basis. Sources of income include pay, fringe benefits, returns on investment, gifts and pension schemes.


Types of income


Original income= Pay, fringe benefits, gifts, alimony, investment


Gross income= Original income+ cash benefits  (Such as Working Families Tax credit and Childs Tax Credit)


Disposable income= Gross Income –Income tax and National insurance


Post Tax income= Disposable income –indirect taxes


Final income= Post tax income +value of non cash sate benefits.

Difficulties in measuring income


  • Those with large amounts of income will seek to minimize their levels on their income tax returns- like wealth; people try to hide how much they have. Prem Sikka (Socialism in reverse-2003) estimates UK tax avoidance schemes (Legal ways of hiding income) cost the Uk £25 billion a year.
  • Which 5 types of income should be measured? For example should it be measured before or after tax?
  • What about hose who work for ‘cash in hand’?
  • Should income be calculated by household or by individual?


Income distribution


  • 1960s top 10% had 6 times the income of bottom 10%
  • 1990s top 10% had 10 times the income of bottom 10%
  • Between 1970- 200 the bottom 10% saw no growth In income on average while the top 10% saw their income double during the same 30 year period.
  • The poorest fifth of society have only 8% of the total income, whereas the top fifth have just less than half (41%).


Progressive tax- The more you earn the higher proportion of tax


Regressive tax- The more you earn the lower proportion of tax


Direct taxes Taken straight out of a person’s original income.

Income tax…

Basic rate 20% £0 to £31,865- Most people start paying basic rate tax on income over £10,000

Higher rate 40% £31,866 to £150,000

Additional rate 45% Over £150,000

Indirect taxes Taxes on spending.

V.A.T …

Standard 20% Most goods and services

Reduced rate 5% Some goods and services, e.g. children’s car seats and home energy

Zero rate 0% Zero-rated goods and services, e.g. most food and children’s clothes

Cash benefits Payments from the government.

Job seekers allowance …

18 to 24 £57.35 a week

25 or over £72.40 a week

Couples (both aged over 18) £113.70 a week

Benefits in kind Services provided by the state free of charge…

·         NHS (National health service)

·         Free fulltime education.


Does this work?


  • Incomes before Tax: Richest 20% earn 18 times more than the poorest 20%
  • After income tax and addition of various benefits- this goes down by 4 times more
  • However, VAT has a greater proportional impact on poorer families, and as a result the actual figure is 6 time more
  • So, there is still considerable inequality, despite tax and social security system.




Difficulties in defining and measuring wealth



  • Should a person’s house constitute marketable wealth?
  • Should pension funds be included as marketable wealth?



  • Lack of data because the UK has no wealth tax
  • Information gained through assessment of wealth for inheritance tax proposes if flawed.
  • Value of assets goes up and down
  • Gaining information through surveys is inaccurate
  • There is no agreement as to what constitutes wealth.


Wealth distribution Britain’s

  • Richest 1% have accumulated as much wealth as the poorest 55% of the population put together, according to the latest official analysis of who owns the nation’s £9.5tn of property, pensions and financial assets.
  • Compared to the other OECD countries the UK has a relatively equal distribution of wealth. The UK has a wealth GINI coefficient of 68.2% compared to an OECD average of 71.71%.


Explanation for the retention of wealth

  • Globalization- Most economies in the world are linked. If a government tried to take wealth from the richest, they would move out of the country- resulting in an economic collapse therefore the government is very careful in their treatment of the rich.
  • Nature of taxation system- Allows a substantial proportion of wealth to be passed from one generation to another (inheritance)
  • Once someone has wealth it easy to create more wealth through investment.


Rownlinson et al (1990) – Identified four major factors in the ability to accumulate wealth (not including the ability to inherit it from parents)

  • High income: The highest income groups are more likely to use part of their income for investment (saving, stocks and shares) Townsend (2004) for example, noted that ‘almost 70% of investment incomes is received by those with incomes above £20,000 a year.
  • Lifestyle- Which include attitudes towards saving
  • Knowledge- relating to investment schemes and opportunities that lead to significant wealth accumulation.
  • Availability of suitable savings and investment schemes


Past paper questions relating to be topic “ wealth and income”


Explain the difference between income and wealth  (4 marks) June 2011


Examine the reasons for increased inequality of wealth In the United Kingdom since the 1970s (24 marks)


Suggest two ways in which wealthy individuals are able to remain wealthy, apart from that mentioned in 3A. (4 marks) January 2012


Suggest two problems in measuring wealth (4 marks) January 2012


Using material from item 3B and elsewhere, assess the reason for the widening gap between rich and poor in the UK (24 marks) June 2013