HookThe £20 that reshaped the bottom of the distribution
In October 2021 the government removed the £20-a-week uplift it had added to Universal Credit during the pandemic — worth about £1,040 a year to roughly 5.5 million households, and the largest overnight cut to the basic rate of out-of-work support in the modern welfare state's history. The Joseph Rowntree Foundation estimated it would pull hundreds of thousands of people, many of them children, below the poverty line. One line in a Budget spreadsheet reshaped the bottom of the UK income distribution.
That is this section in miniature: how income and wealth are shared out, why the spread is so wide, what it means to be poor in a rich country, and what governments can do about it — knowing that every tool has a cost. The first distinction to nail, because students throw away easy marks on it, is that income is a flow and wealth is a stock. Income is what you receive over a period — wages, benefits, dividends, rent. Wealth is what you own at a point in time — housing, pensions, savings, shares. They are related but not the same, and in Britain wealth is distributed far more unequally than income.
ModelMeasuring the spread — the Lorenz curve and the Gini
Income flows from several sources — earnings from work, benefits and pensions, and returns on assets such as dividends, interest and rent. Wealth in the UK is dominated by two things: private pensions and property, which together make up the bulk of household wealth. Because wealth accumulates — you can inherit it, and returns compound — it is always spread more unequally than the income that feeds it.
Economists picture the spread with a Lorenz curve: rank households from poorest to richest along the horizontal axis and plot the cumulative share of income they receive up the vertical. Perfect equality is the 45° line; the further the actual curve sags below it, the more unequal the distribution. The Gini coefficient turns that gap into a single number from 0 (perfect equality) to 1 (one household owns everything). UK income inequality after taxes and benefits gives a Gini of around 0.35 — middling among rich countries — while UK wealth inequality runs closer to 0.6, far higher. The other number that matters is the effect of the state: taxes and benefits together roughly halve the gap between the richest and poorest fifths.
The ONS's redistribution figures make the point concretely. Before taxes and benefits, the original income of the richest fifth of UK households is around twelve times that of the poorest fifth. After direct taxes are taken and cash benefits added — and before even counting benefits in kind such as the NHS — that ratio falls to roughly four to one. Same households, same market economy; the tax-and-benefit system does the compression, and quantifying it like this is exactly the calculation a data-response question rewards.
ModelWhy the gap is so wide
Inequality of income starts in the labour market: differences in marginal revenue productivity, skills and qualifications, and in bargaining power mean a consultant surgeon earns many times a care worker. On top of that sit unemployment and worklessness, differences in household size and the number of earners, and unequal ownership of the assets that throw off dividends and rent.
Inequality of wealth is wider and more entrenched, for reasons that compound. Inheritance passes advantage down the generations. Home ownership let one cohort ride decades of house-price growth while later ones were locked out. Those who already hold assets earn returns that let them accumulate faster than people living pay-cheque to pay-cheque can save. Age matters too — wealth naturally builds over a working life and peaks near retirement, so some measured inequality simply reflects people being at different life stages. AQA wants you to hold two ideas at once: some inequality is the necessary price of incentives — reward for effort, skill and risk-taking drives an economy — but too much can entrench disadvantage, waste talent and, many economists argue, slow growth rather than fuel it.
MechanismThe problem of poverty — absolute, relative, and the trap
Economists separate two kinds of poverty. Absolute poverty means lacking the resources for basic physical needs — food, shelter, warmth; on the World Bank's international line it is income below about $2.15 a day, which almost no one in the UK falls under. Relative poverty measures exclusion from the normal life of your own society, and the UK's official measure is a household income below 60% of the median. This distinction carries a lot of marks, because it has a counter-intuitive consequence: relative poverty does not automatically fall as a country grows richer. If everyone's income doubles, the median doubles too, the 60% line rises with it, and the relative poverty rate is unchanged.
The causes mirror the causes of inequality: unemployment and low pay, sickness and disability, old age on a thin pension, and the number of dependants a low income must stretch across. Poverty then feeds on itself. The poverty trap is the cruellest mechanism: a low earner who takes on extra work can lose most of each additional pound to income tax, National Insurance and withdrawn means-tested benefits all at once, so the reward for working more shrinks to almost nothing — a disincentive built, perversely, into the very system meant to help.
Take a Universal Credit claimant who earns an extra £100 above their work allowance. They pay 20% income tax (£20) and 8% National Insurance (£8), leaving £72. Universal Credit is then withdrawn at its 55% taper on that £72 — a loss of £39.60. Of the original £100 they keep just £32.40. That is an effective marginal deduction rate of nearly 68% — the poverty trap in a single line, and the reason the taper rate is such a fought-over policy dial.
CaseGovernment policies — and the trade-off underneath every one
Governments attack inequality and poverty from both ends of the distribution. On the tax side, a progressive system — UK income tax rates of 20%, 40% and 45%, plus capital and inheritance taxes — takes a rising share as income rises, compressing the top. The catch is behavioural: set rates too high and you risk weaker work incentives, avoidance and the emigration of the highly mobile — the Laffer-curve worry that revenue can actually fall.
On the spending side sit cash benefits and benefits in kind. Benefits can be means-tested (targeted at low incomes, like Universal Credit — cheaper and better aimed, but suffering low take-up and the poverty trap) or universal (paid regardless of income, like the state pension — simple and stigma-free, but expensive and paid to the rich as well). In-kind provision — a free NHS, state education — redistributes real living standards and does more for the poorest fifth than cash benefits alone. Add the National Living Wage to lift pay at the bottom. Every instrument runs into the same tension, the one AQA builds its essays around: the equity–efficiency trade-off. Redistribution that is too aggressive can blunt the incentives an economy runs on; too timid, and it leaves poverty and its costs — wasted potential, worse health, higher crime — in place. There is no free lunch, only a judgement about where to strike the balance.
DataMeasuring poverty — and reading the numbers honestly
How you measure poverty changes who counts as poor, so a strong answer names the measure. The UK tracks relative low income both before and after housing costs — and because housing is such a large and unequal cost, the after-housing-costs figure is markedly higher, which is why London's poverty looks worse once rent is netted off. Alongside relative income, statisticians track absolute low income (against a line fixed in a base year, so growth can reduce it) and material deprivation (whether households can actually afford specific essentials), because income alone misses wealth buffers and one-off costs.
This matters for judging policy. A cut to benefits raises measured relative poverty almost mechanically; a rise in the median during a boom can lift the relative poverty line and increase the headcount even if no poor household is worse off. Top answers refuse to treat 'poverty went up' as self-evidently a policy failure without asking which measure moved and why — precisely the critical handling of data that separates the highest level from the rest.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Three things win marks in this section reliably. First, define your terms precisely: relative poverty is income below 60% of the median, absolute poverty is a fixed line, and income (a flow) is not wealth (a stock) — muddling these is the commonest way to throw away easy marks. Second, use the measurement tools — reference the Lorenz curve and a Gini figure (around 0.35 for UK income, far higher for wealth) rather than asserting inequality is simply 'high'.
Third, every evaluation in this section runs through the equity–efficiency trade-off. AQA's 25-markers ask whether a policy — a higher top rate of tax, a benefit rise, a higher minimum wage — is worth it, and the Level 5 answer weighs the reduction in poverty or inequality against the incentive cost, the fiscal cost, the poverty trap and the risk of avoidance, then reaches a supported judgement. Anchor it in a real policy — the 2021 Universal Credit cut, the taper rate, the National Living Wage — and handle the data critically: a rise in measured relative poverty can come from a rising median rather than falling incomes at the bottom. Examiners reward the candidate who interrogates the number, not the one who merely quotes it.