The poor are paying a bigger proportion of tax than the rich and the gap is widening

The poorest families in the UK are losing more of their income in tax than any other income group, official statistics have revealed, putting pressure on the government not to risk exacerbating inequality by cutting tax credits in next week’s budget.

Figures released by the Office for National Statistics today showed the poorest fifth of households paid 37.8 per cent of their income in taxes last year, while the richest fifth paid 34.8 per cent.

The gap between the two income groups widened compared to the previous year and comes at the same time as an increasing number of Conservatives are calling on George Osborne to cut the top rate of income tax as he makes his final touches to his first budget of the new parliament.

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Labour said the figures demonstrated why the Chancellor must rule out a cut in tax credits, which prop up the incomes of the lowest paid workers, while the TUC said the figures proved the case for an overhaul of the UK’s tax system.

Although Britain’s progressive income tax system takes more from the rich than lower earners, regressive taxes such as VAT and council tax hit those on lower incomes the hardest.

It meant the richest fifth of the population paid £29,200 in direct and indirect taxes last year, while the poorest fifth paid £4,900.

Chris Leslie, Labour’s shadow Chancellor, told The Independent: “These figures underline the fact that many people on middle and lower-incomes are still struggling to pay the bills.

“Yet now George Osborne is planning to reduce tax credits for millions of working people.

“And, after months of ducking questions about a top rate tax cut, he must now rule out another giveaway for the very highest earners.”

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However, in the five years since David Cameron became Prime Minister, the tax burden between rich and poor has narrowed. In the first year of the coalition the poorest fifth of households paid 38.2 per cent of their income to the taxman, with the richest fifth paid just 33.6 per cent.

The ONS figures also revealed that more than half of households received more from the state in welfare payments and pensions than they pay in tax last year – equivalent to 13.7 million families.

This represents a fall on the previous year but remains above the proportions seen before the economic downturn.

Adam Memon, head of economic research at the Centre for Policy Studies, said the figures demonstrated that the level of welfare dependency remained an “economically destructive phenomenon which tears at Britain’s social fabric”.

A report by the thinktank highlighted the “churn” in the benefits system, in which the average household paid £13, 402 in taxes but received £12,939 in cash benefits and benefits in kind.

Its analysis supports the case for reforming the £30bn tax credits system, which is widely expected to fall victim to a large proportion of the £12bn of welfare cuts in Mr Osborne’s budget. Adam Memon, head of economic research at the Centre for Policy Studies, said the figures demonstrated that the level of welfare dependency remained an “economically destructive phenomenon which tears at Britain’s social fabric”.

A report by the thinktank highlighted the “churn” in the benefits system, in which the average household paid £13, 402 in taxes but received £12,939 in cash benefits and benefits in kind.

Its analysis supports the case for reforming the £30bn tax credits system, which is widely expected to fall victim to a large proportion of the £12bn of welfare cuts in Mr Osborne’s budget.

Last week David Cameron called for an end to the “merry-go-round" of the low paid handing tax to the Treasury only to get it back in welfare payments.

The Chancellor faces a tough balancing act, with reports that up to 160 Tory MPs are mounting pressure on him to cut the top rate of income tax from 45p to 40p.

Cutting income tax for those earning more than £150,000 at the same time as slashing tax credits would leave Mr Osborne open to accusations of hypocrisy over his government’s claim to be ushering in a new “blue collar” Conservative message.

Frances O’Grady, general secretary of the TUC, said: “There can be no argument for reducing taxes for the richest when they are already contributing a smaller share of their income than the poorest.

“The government should instead be looking at how the wealthiest can make a fairer contribution to improving the public finances.

“Without tax credits, the low-paid would be much worse off. It will be a disaster for millions of families if the government rushes ahead with plans for extreme cuts to support for people in work. They should focus instead on the investment needed to get productivity growing and wages rising.”

A Treasury spokesperson said: "Today’s figures show that income inequality remains below its pre-crisis level and our tax and benefits polices proving instrumental in helping those most in need.

"With over half a million more people in work and real household incomes rising by over four per cent since the March 2013 cut-off for these figures, it’s clear that the government’s long term plan is set to go on delivering a better economic future for working people.”