UK Income Distribution – Where Do You Fit In?

UK Income Distribution

Only a minority of people are born into wealthy families.  The rest of us need to rely on jobs (at least at first) to generate income, cover our expenses and save money. 

Once you have saved and invested enough money to reach financial independence, you will be able to kick back and work because you want to, not because you have to! 

As we work our way towards that goal, it is important to understand how our income compares to those of others around us.  Having a high income for wealth building is kind of like having running shoes for running – not a pre-requisite but it sure helps!

If you are targeting financial independence, you definitely want to be targeting a higher than average income.  After all, despite our progressive (and sometimes very punitive) tax system, a higher income typically means higher take-home pay and therefore a better ability to save and invest. 

If you want to be even more ambitious, a good aspirational goal to have is to generate income in the top 10%

Finally, for those of you who are in your 20s or 30s with a decent education and good work ethic, reaching the top 5% should be achievable in your lifetime.  You just need to be willing to re-position yourself (potentially through an advanced degree or professional training) and switch to a higher-paid career track or industry.   

Distribution Of Income In The UK

So how does your income stack up against the UK average?   Helpfully, HMRC periodically releases income data gleaned from taxpayers’ tax filings.  Because the data captures people with some income tax liability, you can use it as a broad proxy for the incomes of UK employees. 

Aiming To Be Average

evolution of UK average income over time

As you can see, back in 2000 the average UK income was about £18k/year.  It has grown at a clip of about 3.1% since then to reach £30,515 in 2017.  While 3% growth is probably enough to offset the impact of inflation, it doesn’t leave much behind in terms of real growth. 

The data suggests that if you are making more than £30.5k your income is higher than that of 50% of UK taxpayers.  Therefore, if you want to be average and your income exceeds £30.5k, feel free to relax and give yourself a pat on the back. 

But if you think living an average life is not for you, then it’s worthwhile looking at the split of income by deciles. 

evolution of UK incomes over time

As the chart above highlights, over the past 17 years, income has grown across all the deciles.  In particular, the top two deciles seem to have pulled away from the rest of the pack. 

But is that really true and if so, by how much?   Let’s look at the data in a table format to tease out the growth rates: 

evolution of UK incomes over time by decile

The data shows that if you were in the lowest rung of the income distribution, your income grew the fastest over the past 17 years.  Unfortunately, at £11,200/year, people in this category are probably still below the poverty line. 

As a matter of fact, if you are in the top 50% of UK taxpayers by income, your income growth has not exceeded 3% over the past 17 years, with one notable exception.

As ever, the vilified top 1% managed to eke out a slightly higher than average 3.2% increase in their incomes. 

Are You Aiming For The Top?

As I mentioned above, if you are young, educated and ambitious, you want to be reaching right for the top of the pyramid.  The sooner you do it and the longer you stay there, the faster your path to financial independence. 

To be in the top 5% of UK income earners in 2017 required an income of £75k.  In the professional services industry (accounting, law, consulting, banking) this level of income is achievable within 7 years or so of starting out. 

evolution of UK incomes over time - top 10%

If you live in London, it is likely you could get there in 5 years or less.  You do, however, need to square up the higher income with the cost of living in London in order to make sure you can continue saving and investing at least 20-25% of your income.  In other words, you probably don’t want to be like the Smith family!

The other interesting stat from the table above is that of the top 50% of UK income earners, it is only the top 7% (93rd percentile and above) who managed to eke out compounded income growth of 3%+ per year. 

It is certainly true that the people at the top of the income distribution spectrum are enjoying outsized gains.  They just aren’t as outsized as the media would like you to believe.  

Nonetheless, you should do your absolute best to join this club so that you can also enjoy better than average income gains!

Putting UK Incomes In Perspective

If you live in the UK and are anywhere on the spectrum of incomes above, you should keep in mind how fortunate you are in the first place. 

The chart below summarizes the distribution of individual incomes globally.  The one I managed to find is from 2013 and denominated in USD, but it gives enough information to put things in context. 

global distribution of incomes

The bottom 1% of UK taxpayers had an income of £11,200 in 2017.  At today’s exchange rates, it is roughly $13.6k.

In contrast, the median global income in 2013 was $2,010.  In other words, if you were at the very bottom rung in the UK, you would still be about 7x better off than the person earning a median income globally.  We should all be counting our blessings.

But of course, just because we are more fortunate than someone who lives in an impoverished country, or one torn by war, doesn’t mean that we should be complacent.

If you are truly focused on living your best life possible, you should strive for improvement across all areas of your life.  This includes getting better at your profession and growing your income. 

With that in mind, let’s look at some concrete, actionable techniques you can use to increase your income.

How To Grow Your Income

Set Ambitious Goals

It all starts with a number in your head.  If you don’t believe you can make £100k/year, no one will pay you that much money.  Very often, the difference between ourselves and the person making twice as much money is a (sometimes misplaced) belief in one’s merit and abilities. 

This is a trait investment bankers have in spades.  It, therefore, shouldn’t be a surprise that they tend to make eyewatering amounts of money

Be Mobile

There is a reason why people from all over the world are trying to move to countries like the UK and the US.  They see the opportunity that’s worth crossing deserts and swimming across channels for. 

Just because you are already here doesn’t mean you should stop moving forward.  Always be open to opportunities to relocate to get a better paying job, a cheaper house or a better state school for your kids.  Inertia kills all progress.

Invest In Education

If you are in school or university, bust your chops as hard as you can to knock it out of the park.  Focus on getting fantastic grades and building a network with your fellow students, professors and potential employees.  The ROI on the investment of time and effort will be some of the best you will achieve in your life.

If you are already working, understand what skills are needed to progress to the next level or a better-paying role.  Then go out and get those skills to ensure that you, too, can get that better paying job. 

Work Longer – Or Harder

It has never been easier to have a side hustle.  Everyone can drive an Uber or work for Deliveroo on a part-time basis.  You can get a part-time job a few nights a week or during the weekend. 

Finally, if you are on an hourly rate, you can always try to increase your hours.   All it takes is a desire to make more money. 

Use Your Wealth-Building Tools

Making money isn’t easy.  Taking advantage of schemes that allow you to boost your savings and investments.  Whether its pensions, SAYE, ISAs, LISAs, SIPs – read about them, understand them and use them. 

Most Importantly, Invest!

This is the most important thing you can do to invest your income.  As the old saying goes – money makes money, but the money that money makes, makes even more money! 

Even if you are in the top 7% of UK income earners, you cannot rely on your 3% income growth to reach financial independence.  The only way is to continuously save and invest.

If you made £100k last year and got a 3% raise this year, your income would go up by £3.

Now imagine that you made £100k last year and saved £25k.  If you invested that £25k and made a 6% return in the stock market, your income this year would go up by another £1.5k.  So instead of 3%, your income would grow by 4.5%, and that is even before the magic of compounding takes hold.

Saving money is important, but if you try to save your way to wealth, inflation will eat you alive. 

Readers, where do you aspire to be on the income distribution spectrum and what are you doing to get there? 

About Banker On Fire

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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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