Programme interactions and fiscal drag in the UK tax-and-benefit system: effects on income inequality.

This article provides a detailed quantitative analysis of the United Kingdom's tax-and-benefit system in 2023, focusing on its role in reducing income inequality. Using microsimulation modeling and Family Resources Survey data, the study finds that the system lowers income inequality by 27.6 percent, measured by the Gini coefficient, with both means-tested benefits (such as Universal Credit and Pension Credit) and non-means-tested benefits (including contributory pensions and Jobseeker's Allowance) contributing significantly to redistribution. The analysis highlights that fiscal drag—where tax thresholds remain fixed despite inflation—raises revenue less equitably than explicit tax rate increases, as it imposes regressive effects on those near tax thresholds. Additionally, increasing the Universal Credit standard allowance is more effective at reducing inequality than lowering its taper rate, and interactions between different benefit programs can offset some intended redistributive effects. The findings emphasize the complexity of the UK system and suggest that transparent, targeted policy adjustments can improve its equity and efficiency.