Overview
The past 14 years have witnessed an enormous amount of reform to the tax and benefit system. While it is tempting for politicians to draw attention to one set of reforms or another, what matters for household incomes is the whole system. In this report, we study the impact of policy changes to direct taxes (income tax, National Insurance contributions and council tax), indirect taxes (VAT, duties) and welfare benefits. We examine reforms implemented since 2010–11, as well as those that have been announced and (on current plans) will be implemented by 2027–28. As well as highlighting how these reforms have affected richer and poorer households, those of different ages, and different family types, we draw out some key themes that have emerged – intentionally or otherwise – from successive Chancellor’s decisions. Whoever forms the next government, it is this tax and benefit system that they will inherit and which departures from will be measured against.
Key findings
1. The tax and benefit system has undergone significant changes since April 2010, with cuts to both benefits and direct taxes for most working-age households, the opposite for pensioners, and a tax rise for those on the highest incomes. Tax freezes over the next three years are set to increase tax liabilities, but with inflation down this is not set to change the distributional pattern significantly. Someone on average earnings (around £35,000) today pays about £1,600 less in income tax and National Insurance contributions than someone on the same real level of earnings would have paid in 2010–11.
2. Broadly, the effect of tax and benefit reforms from 2010–11 to 2024–25 has been to reduce incomes of the bottom 40% and the top 10% of households, and increase incomes in between. The poorest fifth of households have lost an average of £1,800, or 10.2% of income, while the richest tenth have lost £2,200 (1.7% of income) on average. The middle and upper middle of the income distribution have gained on average; for example, among the 7th decile incomes have risen by almost £1,300 (2.5%). Overall, direct personal taxes have been cut, and the bottom 90% of the distribution have seen tax liabilities reduced because of policy changes over this period.
3. The period 2019–20 to 2024–25, corresponding to the most recent parliament, marked a change in direction from the years from 2010–11 to 2019–20. Whilst the most recent parliament has seen taxes and benefits rise, the previous period saw both cut.
4. Families with children have been especially affected by benefits changes, both because of their greater reliance on benefits, and because some of the reforms are specifically targeted at this group (such as the ‘two-child limit’). Out-of-work families with children have lost £5,500 a year on average as a result of benefit reforms; in-work families with children with below the 40th percentile of household earnings have lost £3,100 on average. But while cash benefits have been reduced, there have been significant expansions of free childcare for working families.
5. Pensioners, unlike working-age adults, have seen benefits and taxes go up. The triple lock has ensured the state pension has risen faster than inflation – but pensioners have not benefited from cuts to National Insurance contributions, which they do not pay anyway, nor from increases in the personal allowance, since they no longer have a higher personal allowance than working-age adults. As a result, they have seen little change in average disposable income from tax and benefit changes from 2010–11 to 2024–25.