Disposable income is the gross or total income of a firm or individual from where direct taxes (including income tax, PAYE etc) have been successfully deducted. After deducting important expenses including clothing, food, shelter etc., the balance amount is called discretionary income, which the person who has earned it is free to save or spend. Besides, the disposable income amount is utilized for calculating a person’s debt to income ratio.
Disposable income is usually monitored on a regular basis, since it is one of the several important economic indicators, which is used for gauging an economy’s overall condition.
How to calculate disposable personal income?
For instance, if the personal income of your household is 100,000 dollars from your salary and in case you pay tax at the rate of thirty fiver percent, then your disposable personal income would be 65,000 dollars (i.e. 100,000 dollars- 35,000 dollars). Economists generally utilize DPI to assess the rate of spending or saving of households’ across the country.
Thus, disposable income is that portion of the income generated by an individual over which he/she has full discretion. To determine, disposable income, it is very important to assess the gross income, which also includes salaries and wages, dividend and interest payments as well as business profits. In addition to this, it is also important to determine the social-security related benefits, alimony and pensions. Besides, obligation related payments, which also includes social insurance contribution and income taxes must also be deducted to determine the actual disposable income.
Usually, the indirect taxes, including value add taxes, sales tax, contribution made by the employer towards social insurance and payroll taxes are not subtracted from the disposable income. Even though they minimize a person’s spending capacity to a large extent, attributing them to particular families and persons becomes really difficult. Another important thing that must be noted here is that as per official stats, if a person has a low income after deduction of taxes, then he/she may actually be working on a part-time basis and may be contributing towards his/her family’s jointly held resources.
However, even after making these adjustments, disposable income must never be confused with economic welfare or standard of living.
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software