In deciding how rich or poor someone is relative to the rest of the population, we look at their
net household equivalised income. This prompts three obvious questions:
Why net income?
Net income is total income minus direct taxes (income tax, national insurance and council tax), and includes the value of any social security benefits received. This is the income that people have available to buy goods and services, so it is a better measure of material living standards than pre-tax income or some measure of earnings alone. There is no definition of income that gives a perfect measure of living standards, but given the data available this is probably the best.
Why is income measured at the level of the household?
The welfare of any one individual in a household will depend not only upon their own income, but also on that of other household members. By measuring income at the household level, we are implicitly assuming that all individuals within the household are equally well off and therefore occupy the same position in the income distribution. In practice that will probably not be true, but it is perhaps the least arbitrary assumption we can make.
What is "equivalised income"?
The income that a household needs to attain a given standard of living will depend on its size and composition. For example, a couple with dependent children will need a higher income than a single person with no children to attain the same material living standards. "Equivalisation" means adjusting a household's income for size and composition so that we can look at the incomes of all households on a comparable basis. Official income statistics use the 'Modified OECD' equivalence scale, in which an adult couple with no dependent children is taken as the benchmark with an equivalence scale of one. The equivalence scales for other types of households can be calculated by adding together the implied contributions of each household member from the table below.
|Modified OECD Equivalence Scale|
|Each child aged 0-13||0.20|
|Each child aged 14-18||0.33|
For example, a household consisting of a single adult will have an equivalence scale of 0.67 -
in other words he or she can typically attain the same standard of living as a childless couple
on only 67 percent of its income. In a household consisting of a couple with one child aged three,
the head of the household would contribute 0.67, the spouse 0.33, and the child 0.20, giving a total
equivalence scale of 1.20. In other words this household would need an income 20 percent higher than
a childless couple to attain the same standard of living. To gauge where you are in the income distribution,
we ascertain the equivalence scale of your household and then calculate where you would lie if the rest of
the population lived in households of the same type.
Where the data comes from
We derive the distribution of income for the population of the United Kingdom as a whole from the most recent available data, in the Family Resources Survey, 2010/11. The data and methodology are the same as those used by the Government in its annual Households Below Average Income publication. To bring the figures up to date, we have adjusted them in line with changes in average household incomes shown in the national accounts up to the fourth quarter of 2011 and with changes in the retail prices index up to March 2012.