A household’s spendable income is the net annual amount it has available to spend. In general terms, it is gross income minus premiums and taxes.
For employees, people claiming benefits and people receiving a pension, a rough estimate of the net annual income is thirteen times the net monthly amount received (twelve months plus holiday allowance). For the self-employed, net annual income roughly equals profits after tax. The household income is the sum of the annual income of all household members, plus any received rent allowances, children’s allowance and study grants.
This estimate does not take into account all sorts of smaller and larger items that may affect spendable income. To calculate a more precise household income, net income from property (interest received minus interest paid, dividends etc.) and net alimony payments received must be added, while alimony paid and health insurance costs must be subtracted.
From spendable income to standardised income
Naturally, the level of prosperity depends a lot on how many people have to live on a household’s income. To make incomes of households with various size and composition comparable with each other, incomes are standardised. This standardised income is also called ‘purchasing power’.
Incomes are standardised by dividing spendable household income by a factor which reflects the advantages of scale of large households. The single person household is taken as the norm. The factor for these households equals 1. For each extra adult 0.19 to 0.37, and for each underage child 0.15 to 0.33 is added to this factor.
For a couple without children, for example, the factor is 1.37. A single person with a spendable income of 10 thousand euro and a couple with a spendable income of 13.7 thousand euro therefore have the same level of prosperity: after standardisation, the purchasing power for both households is 10 thousand euro.
The factor used to divide the income is called the equivalence factor. The equivalence factors are given in the table below for the most frequently occurring household compositions in the Netherlands. The equivalence factor for a single parent family with two children, for example, is 1.51.