3. Things you need to know about this release

Sources of income estimates

This release provides headline estimates from the effects of taxes and benefits on household income (ETB) and has been designed to provide more timely figures of main indicators. ETB data are from the Office for National Statistics’s (ONS’s) Living Costs and Food Survey (LCF), a voluntary sample survey of around 5,000 private households in the UK.

An important strength of the ETB data is that comparable estimates are available back to 1977, allowing analysis of long-term trends, and expenditure data are also available for the sampled households. This release also currently provides the earliest survey-based analysis of the household income distribution available each year, allowing people insight into the evolution of living standards as early as possible.

However, as with all survey-based sources, the data are subject to some limitations. The LCF is known to suffer from under-reporting at the top and bottom of the income distribution as well as non-response error (see The effects of taxes and benefits upon household income Quality and Methodology Information report for further details of the sources of error).

The Department for Work and Pensions (DWP) also produces an analysis of the UK income distribution in its annual Households below average income (HBAI) publication, using data from its Family Resources Survey (FRS). While the FRS is subject to the same limitations as other survey sources, it benefits from a larger sample size (approximately 19,000 households) than the LCF and, as such, will have a higher level of precision than ETB estimates. In addition, HBAI includes an adjustment for “very rich” households to correct for the under-reporting using data from HM Revenue and Customs’s (HMRC’s) Survey of Personal Incomes (SPI). These differences make HBAI a better source for looking at income-based analysis that does not need a very long time series (the FRS data are available from financial year ending (FYE) 1995) and when looking at smaller sub-groups of the population, particularly at the upper end of the income distribution.

In order to address some of the limitations with the current ETB estimates, ONS is currently working on transforming its data on the distribution of household finances. The first part of this work has concentrated on combining the samples from the LCF and another of ONS’s household surveys, the Survey on Living Conditions (SLC) and harmonising the income collection in these questionnaires so that these estimates from FYE 2018 onwards will benefit from a larger sample size of around 17,000 households.

In addition, ONS is working towards linking data from administrative and other non-survey sources, including HMRC Real Time Information (RTI) and DWP benefits data. Although these other sources also have their own limitations, by using them together with surveys we should be able to produce better data on household income. For further information on other sources of income and earnings data, including the appropriate uses of and limitations of each data source see A guide to sources of data on earnings and income.

What is average household income?

This bulletin looks at two main measures of average household income, the mean and the median. Figure 1 shows the distribution of equivalised disposable income for FYE 2017, clearly indicating the skewness of the distribution; the mean income level (£32,700) is greater than the median (£27,300). The greatest number of households (mode) falls into the £17,000 to £18,000 bracket, which is in the third decile of the distribution.

Figure 1: Distribution of UK household disposable income, financial year ending 2017 Source: Office for National Statistics Notes: No expenditure on housing costs (apart from Council Tax) is deducted from disposable income in this release. HBAI estimates are available before and after housing costs – see the Households below average income (HBAI) publication for further details. Download this image Figure 1: Distribution of UK household disposable income, financial year ending 2017 .png .xls

The mean simply divides the total income of households by the number of households. A limitation of using the mean is that it can be influenced by just a few households with very high incomes and therefore does not necessarily reflect the standard of living of the “typical” household. However, when breaking down changes in income and direct taxes by income decile or types of households, the mean allows for these changes to be analysed in an additive way.

Many researchers argue that growth in median household incomes provides a better measure of how people’s well-being has changed over time. The median household income is the income of what would be the middle household, if all households in the UK were sorted in a list from poorest to richest. As it represents the middle of the income distribution, the median household income provides a good indication of the standard of living of the “typical” household in terms of income.

What is disposable income?

Disposable income is arguably the most widely used household income measure. Disposable income is the amount of money that households have available for spending and saving after direct taxes (such as Income Tax, National Insurance and Council Tax) have been accounted for. It includes earnings from employment, private pensions and investments as well as cash benefits provided by the state.

Figure 2: Stages in the redistribution of income Source: Office for National Statistics Download this image Figure 2: Stages in the redistribution of income .png

Comparisons over time

This bulletin looks at how main estimates of household incomes and inequality have changed over time. In order to make robust comparisons historic data have been adjusted for the effects of inflation and are equivalised to take account of changes in household composition. More information on the details of these adjustments can be found in the Quality and methodology section of this bulletin.

Estimates in this release are not based on a longitudinal data source so the composition of households differs between periods of time. When growth rates are quoted, they compare the average for a group of households in one period to the average for a different set of households in the next period.

Statistical significance

Statistical significance indicates whether a reported change is likely to have occurred by chance. Any change that has been described as significant is significant at the 95% level. This means that the probability that the difference occurred by chance is low (1 in 20 or lower).