With the stretch of household finances increasing, it is having a detrimental effect on everybody trying to live steadily. Whether it is travel prices, food, or clothing, the prices are rapidly increasing. Price inflation is making the amount of money a person has to spend on essentials limited.
Disposable incomes in the UK are transforming into being luxuries as our money is being squeezed out of us, unfortunately
But, what actually is a disposable income? How much should you really have? How does a disposable income work? Continue reading this guide to disposable income to answer all your queries!
Table of Content
What is Disposable Income?
Disposable income is the amount of money that households will have available for saving and spending after personal taxes have been deducted.
Disposable incomes can be used when applying for an IVA or help for payment for bankruptcy. If your receiver believes you can afford to pay your debt, you can be made to pay all or some of your disposable income.
Disposable incomes are similar to, but not be confused with a Discretionary income.
Disposable vs Discretionary income
Disposable and discretionary incomes are both economic indicators. Disposable and discretionary income will outstand an individual or companies financial stability.
Disposable income is the money accessible for saving or spending on essentials and non-essential after deducting direct taxes. This type focuses less on necessities, and more on post-tax money for yourself.
Discretionary income, on the other hand, is the money a household needs to save or spend after essentials are paid for. The essentials consist of student loans, taxes, mortgages or rent, and credit card debts.
Gross Disposable Household Income
The Gross Disposable Household Income, also known as GDHI, is the amount of disposable income that is accessible to a household at the end of the month after taxes have been deducted.
There are ways to calculate your gross disposable household income. Keep reading this guide to learn how to calculate your GDHI!
Every person living in your household that has an income should work out their GDHI.
When you combine your own personal disposable income with the rest of the household, you will find out your gross household disposable income.
Certain things, such as debt consolidation helps to increase the amount of disposable income you have.
How do I calculate my GDHI?
To calculate your gross disposable household income, you should add your income together. Your income will include household finances, salary, property income, and bonuses. It will also include taxes such as income tax and council taxes to the government.
Depending on your family size, the highest disposable income available to you will be situational. The total income for a larger family size will have more money spent more on necessities. Therefore, the percentage of income left after payments for housing costs and subtracting taxes will give the real disposable income remaining.
When you work out your GHDI, you should include:
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Wages
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Self-employed earnings
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private pensions
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investments
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claims
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gifts
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cash benefits
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grants
After this, you can deduct:
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Income tax
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Mortgage or rent
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Council tax
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National insurance
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Other bills
The figure you have left will be your calculated average household disposable income!
How much of your income should be disposable?
You might be confused about the amount of your income that should be disposable. The answer to this completely varies depending on individual situations.
There is a famous 50-30-20 rule that many people believe to work, consisting of:
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50% of your income should be on essentials (rent/mortgage, bills, food, and transport)
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30% should be on your wants (going out to eat, shopping, and trips)
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20% of your income should be on savings or debt repayment.
Therefore, many people agree that 30% of your income should be your disposable income.
Every situation for each individual is different so it is hard to suggest an exact number, however, this method works for a lot of people.
It is important to focus on what is essential. If you have food at home it is not essential to go out for food. Similarly, you do not need to go to the gym to work out, this can be done at home.
Prioritise the essentials before you spend to keep yourself out of the red zone!
Average Disposable Income UK
As the prices of living in the UK are rising dramatically, the more disposable income is diminishing. It is proven that, on average, the UK has less money for spending now.
The average monthly disposable income has fallen by £100 since last year. Despite the increase of people spending more cautiously now, the prices of living have increased.
According to the Office for National Statistics (ONS), the household disposable income average is £29,000. This evidence was shown from the Office for National Statistics ‘household finances survey’. The presented data showed equivalised household disposable earnings for individual’s income.
Expendable Income Calculator
An Expendable Income Calculator, also known as a budget calculator, helps you to find out what your take-home figure is.
You should be completely transparent when you measure your payments. You could end up calculating incorrectly and the cost available for your expendable income could be adjusted to either rise or fall.
If you spend £40 a month on getting your nails done- this should be included. Missing any payments will not make the calculations work, consequently leading to a fall into debt.
Budgeting Tips
Creating budgets in monthly spending can help with disposable income rises. Budgets will help you avoid spending so much on things you do not need.
Here are some great tips for budgeting:
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Ensure that you scatter spending on haircuts, nails, etc.
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Factor large spending for Christmas and holidays.
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Using a spreadsheet or a spending diary can help to see where you can save.
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Factor in any cash withdrawals.
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Look at your bank statements.
The best way to budget is by looking at your spending choices and deciding whether your purchases are ‘essential’. It is also a brilliant idea to calculate your spending to assess your spending habits and work on it from there.
Summary
Many households in the UK are shocked by the average disposable income. Inflation of prices has made it difficult to save money and budget, consequently making households spend more.
You will benefit from calculated savings and gross disposable household income. This will show you clearly how much you should be able to spend.
Popular Questions
What do the ONS do?
The Office for National Statistics are the largest independent producer of official statistics and its recognised national statistical institute. Collecting and publishing statistics related to the economy, population and society at national, regional and local levels. From disposable income UK surveys to financial reports on United Kingdom economy.
How do ONS collect data?
ONS collects data from surveys to UK citizens. Data owned by the ONS include major government surveys, such as the Labour Force Survey and the Crime Survey for England.