In deciding how rich or poor someone is relative to the rest of the population, we look at their net household equivalised income. This prompts three obvious questions:

Why net income?

Net income is total income minus direct taxes (income tax, national insurance and council tax), and includes the value of any social security benefits received. This is the income that people have available to buy goods and services, so it is a better measure of material living standards than pre-tax income or some measure of earnings alone. There is no definition of income that gives a perfect measure of living standards, but given the data available this is probably the best.

Why is income measured at the level of the household?

The welfare of any one individual in a household will depend not only upon their own income, but also on that of other household members. By measuring income at the household level, we are implicitly assuming that all individuals within the household are equally well off and therefore occupy the same position in the income distribution. In practice that will probably not be true, but it is perhaps the least arbitrary assumption we can make.

What is "equivalised income"?

The income that a household needs to attain a given standard of living will depend on its size and composition. For example, a couple with dependent children will need a higher income than a single person with no children to attain the same material living standards. "Equivalisation" means adjusting a household's income for size and composition so that we can look at the incomes of all households on a comparable basis. Official income statistics use the 'Modified OECD' equivalence scale, in which an adult couple with no dependent children is taken as the benchmark with an equivalence scale of one. The equivalence scales for other types of households can be calculated by adding together the implied contributions of each household member from the table below.