It’s fair to say finance is one of the most important considerations in a person’s life. To live comfortably, there are a number of actions a person can take to stay on top of their finances, such as budgeting, building up savings, making investments, and so on. All of them contribute to the overall household income.
But sometimes your income is not enough and some extra help from the government is needed. In those cases, household income is a key term you will need to understand and become familiar with, especially if you are planning to apply for a social benefit in the UK. For example, if you want to get Student Finance, Disabled Students’ Allowance (DSA), or an Adult Dependents Grant, among others.
This article examines household income, its importance, and the difference between it and other usually confused terms, for you to get a better understanding of this crucial concept.
1. What Is Household Income?
Household income is the total gross income of a household within a 12-month tax year. This means it is the total income before any taxes are paid. It will include the income of all the people in the home who are above the age of 16. Every single income earned is taken into account. That includes salary, benefit payments, income from investments, rental incomes, pensions, and any other source of revenue.
Persons do not need to be related in any way to be part of the household income. Even if an individual’s income is not used to maintain the household, it is still counted. They are part of the statistics as long as they occupy the same home.
An Example
Here is a practical example of household income. Let’s say Simon lives with his wife, Jane. They have 2 children who are at school and under the age of 16. Simon works for the local council and earns £3,600 per month before tax. Jane works in IT and receives £4,000 per month before tax. Simon also has a separate property that he rents out and brings in a rental income of £12,000 per year. The household income for Simon and Jane per year is:
(£3,600 x 12) + (£4,000 x 12) + £12,000 = £103,200
Note that, in the UK, a household income above £100k is well above average, meaning it is considered a middle-class income.
2. Why Is Household Income Important?
Household income is an important indicator of the wealth of a country. Using such metrics, people can distinguish how well a country is doing. By zoning into specific areas of a country, one can establish economic standards within specified regions. For instance, the average household income in London is higher than the household income in the South West of the country.
Household income is a tool used by financial lenders to assess loans. But this has an effect on our daily lives because people in an area or home with a higher income are more likely to receive loans than those in less well-off regions. For instance, if you wanted to obtain a mortgage, your current household income may play a key part.
3. The Differences Between Household Income, Family Income, And Per Capita Income
While household income considers the income of all occupants in a house, family income only incorporates a family’s income. Thus, if any people are renting or not part of the family unit, they will be excluded. In contrast, Per Capita income is each person’s income within the home (excluding those under the age of 16). They are different metrics but ultimately measure the people’s wealth within a region or country.
4. Average Household Income VS. Median Household Income
The average household income is calculated by adding all the household incomes in an area and dividing them by the total number of households. The median household income, in contrast, takes the middle point of all the household income figures.
Median Household Incomes are a better representation in areas where the statistics are skewed with extremes. For instance, somewhere like London, there are a minority of households with outlandish incomes running into millions. They are not representative of the majority of homes. Finding an average household income using these figures will present a misleading result. Therefore, using numbers from median household incomes better reflects the economic situation.
5. The Future Outlook of UK Household Incomes
Difficult economic terrain is the widely predicted forecast for the UK and the rest of the world for the next few years. We could expect the annual household and disposable incomes to fall in the next few years as the harsh financial conditions bite. This has come about because of the recent Covid pandemic and the resultant economic turmoil. The situation has even prompted the UK government to take steps to help its citizens.
Last Lines
Household income measures the wealth of a nation or a region within the country. It is one of the many economic metrics used by individuals, organisations, and the government to understand the financial picture. If you wish to see where your household income fits with the rest of the population in the UK, you can find out here.
