1. Main points

  • This is the first edition of a new experimental release designed to provide provisional estimates for measures of the distribution of household income significantly ahead of the main estimates produced from household surveys

  • The provisional estimate of median household disposable income for 2014/15 is £25,600. This is £1,500 higher than its recent low in 2012/13, after accounting for inflation and household composition, and at a similar level to its pre-downturn value (£25,400)

  • Median income for retired households continued to increase following the economic downturn and provisional estimates for 2014/15 suggest it is now £21,100, which is £1,800 higher in real terms than in 2007/08 (£19,300)

  • By contrast, the provisional 2014/15 value of median income for non-retired households is £28,100, which remains around £800 below its pre-downturn level (£28,900)

  • Early estimates of income inequality in 2014/15 are broadly unchanged from those for the previous financial year. Since 2007/08, there has been a slight decrease in inequality on a range of measures

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2. Introduction

In order to properly understand changes in households' material living conditions, it is important to have measures which reflect the experience of the typical household, such as median household disposable income, as well as other indicators which can also provide a description of the income distribution. However, the complexities involved in collecting, processing and analysing household financial survey data mean such indicators are typically only available with a significant time lag.

In order to meet the considerable user demand for more timely data on household incomes, ONS have developed this new set of Experimental Statistics, produced using so-called "nowcasting" techniques.

What is nowcasting?

Nowcasting is an increasingly popular approach for providing initial estimates of such indicators. Unlike forecasting, which relies heavily on projections and assumptions about the future economic situation, nowcasting makes use of data that are already available for the period of study.

Although, at the time of producing these statistics, detailed survey data on household incomes are not yet available for 2014/15, a lot is known about various individual components of household income, as well as other factors that affect them. This information includes data on earnings, employment and inflation, as well as details of how changes to the tax and benefits system affect different types of households and individuals. This information is then used to adjust income survey data for recent years to reflect the current period. This technique allows the publication of estimates for measures such as median disposable income far earlier than was previously possible.

It is unrealistic to expect nowcast estimates to perfectly reflect changes in the distribution of income, particularly when examining smaller sub-groups of the population, so the estimates should be treated as providing an early indication of what the full survey-based data will show when it is available in 2016.

The methodology used in this bulletin has undergone significant testing and benefited from the experience of a range of external experts to ensure it is as robust as possible. As Experimental Statistics, the content of this bulletin and the methodology behind it will continue to be evaluated to ensure that user needs are met.

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5. Economic context

In the financial year 2014/15, real output in the UK economy increased 2.9% on the preceding 12 months. This is an increase from the 2013/14 growth rate and continues the strong recovery from the 2008/09 economic downturn. By the end of the period, the UK had recorded 9 quarters of consecutive economic growth. While aggregate real GDP surpassed its largely symbolic pre-economic downturn peak in Quarter 2 (Apr to June) 2013, GDP per capita only passed its previous high in Quarter 1 (Jan to Mar) 2015. However, in the 2014/15 financial year, GDP per capita remained 0.1% below the 2007/08 level despite growing by 2.2% between 2013/14 and 2014/15.

The strength of the UK economy over this period has coincided with improvements in the labour market as the demand for labour responded to the robust growth of output. In the 3 months to March 2015, the headline employment rate increased to 73.5%, with the number of people in employment at a record high. Over the same period, the unemployment rate fell to 5.5%, which is 1.3 percentage points lower than a year earlier and the lowest level since mid-2008.

Analysis in the October 2015 Economic Review highlighted the extent of this recent labour market tightening, with a range of indicators suggesting a return towards pre-downturn conditions. As economic theory would suggest, this tightening has been reflected in a pick-up in nominal earnings growth. In the 3 months ending March 2015, regular pay was 2.3% higher than in the same period a year earlier. While this rate remained below the pre-downturn trend, it marked a 1.0 percentage point increase in nominal pay growth from the same period in 2014.

Alongside growth in earnings, one component that determines households’ real income growth is the rate of price inflation in the economy. In March 2015, the Consumer Price Index (CPI) measure of inflation fell to 0.0%. During the 2014/15 financial year, a sharp fall in the price of oil and increased supermarket competition helped push inflation to record lows, which eased pressure on real household incomes. Combined with a pick-up in nominal earnings growth, the rate of real earnings growth in March 2015 increased to its highest rate since the economic downturn.

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6. Policy context: Changes to taxes and benefits in 2014 to 2015

Some of the main tax and benefit changes occurring during 2014/15 included:

  • Child tax and working tax credits: The basic element of Working Tax Credit (WTC) rose by £20 (around 1%) to £1,940 a year. The family element of Child Tax Credit (CTC) was frozen at £545 a year, while the child element rose by £30 (around 1%) to £2,750

  • Benefit uprating: Benefits for working age people, including Universal Credit, Jobseeker’s Allowance and Income Support were increased by 1% in April 2014, below the rate of inflation. Benefits received by disabled people and pensioners (including Personal Independence Payments , Attendance Allowance and Incapacity Benefit) were increased in line with the Consumer Prices Index (CPI) at 2.7%. The State Pension was also increased by 2.7% due to the ‘triple lock’ which guarantees to increase the basic State Pension by the higher of CPI inflation, average earnings or a minimum of 2.5% every year

  • Personal independence payment: The roll-out of Personal Independence Payment (PIP) continued during 2014/15. PIP is replacing Disability Living Allowance (DLA) for adults aged under 65 in England, Wales & Scotland. PIP is made up of 2 components and paid at a standard and enhanced rate which increased by Consumer Prices Index (CPI) at 2.7% for 2014/15. Eligibility for PIP is assessed using different criteria than for DLA. This assessment includes a review of an individual’s ability to participate fully in society rather than the severity of impairment. All new claimants were assessed for PIP from June 2013. During 2014/15, existing DLA claimants were invited to be assessed for PIP in an increasing number of postcode areas

  • Child benefit: The rate for a first child rose by £0.20 (around 1%) to £20.50, while the rate for second & subsequent children rose by £0.15 (around 1%) to £13.55 per week, having been frozen for the 3 previous years

  • Income tax: Age related personal allowances continued to be phased out. The personal allowance for those born after 5 April 1948 increased from £9,440 to £10,000. By contrast, the personal allowances for those born between 6 April 1938 - 5 April 1948 and those born before 6 April 1938 remained at £10,500 and £10,660 respectively. In addition, there was a reduction in the starting level for the higher rate band, from £32,011 to £31,866. Combined with the personal allowance, this meant that people paid the higher rate of 40% on any taxable income above £41,865, up from £41,450 in 2013/14

  • Council tax: In 2014-15, 60% of eligible local authorities in England made use of a Council Tax freeze grant. This meant that the average band D dwelling council tax set by local authorities in England for 2014-15 was £1,468, an increase of £12 or 0.9% on 2013-14. Council Tax levels were frozen in all local authorities in Scotland. However, in Wales, the average band D Council Tax increased by 4.2% compared with 2013/14

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7. About these statistics

How are these statistics produced?

The input data for this analysis comes from the Living Costs and Food (LCF) survey and the Effects of Taxes and Benefits on Household Income (ETB) dataset which is derived from the LCF. Together these provide information on income, expenditure and important family characteristics. These data are first adjusted to reflect how changes in the macro-economic conditions have affected households at different points of the income distribution. The next step of the analysis involves applying the rules of the current tax and benefit system to the household level data to calculate disposable incomes for those households4. Finally, adjustments are made to take into account changes in labour market participation and the socio-demographic characteristics of the population.

For this statistical bulletin, historical income data were used to estimate household income data for the 2013/14 and 2014/15 financial years. The growth rate between the 2 nowcasts for measures such as equivalised disposable income was then applied to the published 2013/14 estimates from the latest Effects of Taxes and Benefits on Household Income (ETB) release, published 29 June 2015.

A detailed description of the methodology is provided in the accompanying article, "Nowcasting household income in the UK: Methodology, 2015 (251 Kb Pdf)".

How do these estimates fit in with other official statistics on household incomes?

These experimental nowcast estimates have been developed to serve as early or provisional estimates of figures which are currently published in the Effects of Taxes and Benefits on Household Income (ETB). When the survey based ETB figures for 2014/15 income are available in 2016, they will supersede these nowcast estimates. We will also use these survey-based figures to evaluate the accuracy of these nowcasts.

The figures published in this bulletin and those in ETB use exactly the same definition of disposable income used in "the Effects of Taxes and Benefits on Household Income" (ETB), which in turn is consistent with the concepts set out in the second edition of the UNECE Canberra Handbook (UNECE, 2011), which sets out the main international standards in this area. Additionally, these estimates and ETB use the same primary data source in the Living Costs and Food survey.

The Department for Work and Pensions (DWP) also publishes analysis each year, particularly focusing on the lower part of the household income distribution, in their publication Households Below Average Income (HBAI). Due to HBAI being based on a larger survey, along with some methodological and conceptual differences, HBAI and ETB estimates for these figures can differ slightly from each other. However, historical trends are broadly similar across the 2 sources. However, these nowcasts use the ETB methodology and data source so may not reflect future changes in HBAI.

What are Experimental Statistics?

The UK Statistics Authority Code of Practice defines Experimental Statistics as “New official statistics undergoing evaluation. They are published in order to involve users and stakeholders in their development and as a means to build in quality at an early stage.”

The data contained within this release have undergone the same high levels of quality assurance as other official statistics. However, as Experimental Statistics, the methodology used to create them remains under development and may be revised following further evaluation. It is therefore recommended that this is taken into account when using the findings.

As with any other nowcast, the accuracy of these indicators will inevitably depend on many factors. Throughout the development work feeding into this bulletin, a variety of approaches have been tested in order to develop a robust methodology, and the experience of external experts has been used in order to make use of international best practice. Despite this, it is unrealistic to expect nowcast estimates to perfectly reflect changes in the distribution of income, particularly when examining smaller sub-groups of the population, meaning that the final survey data may show different patterns of change for some groups. This is taken into account in the level of detail presented in the initial edition of this bulletin.

In line with the UK Statistics Authority’s statement on "Assessment and Designation of Experimental Statistics", we will be carefully evaluating these new estimates against the Code of Practice for Official Statistics. This will include assessments of both the quality of the estimates themselves and the extent to which they meet user needs.

Accuracy and reliability of nowcast estimates

The nowcast estimates are subject to the same degree and types of statistical error as any other analysis based on survey data. In particular, as the LCF data is a sample survey, the estimates are subject to sampling error. Surveys gather information from a sample rather than from the whole population. The sample is designed carefully to allow for this, and to be as accurate as possible given practical limitations such as time and cost constraints, but results from sample surveys are always estimates, not precise figures. This means that they are subject to a margin of error which can have an impact on how changes in the numbers should be interpreted, especially in the short-term. In practice, this means that small, short-term movements should be treated as indicative, and considered alongside medium and long-term patterns in the series.

As well as sampling error, all statistics, including these "nowcast" estimates, are also subject to non-sampling error. Non-sampling error includes all sources of data error that are not a result of the way the sample is selected. Throughout the development work feeding into this bulletin, a variety of approaches have been tested in order to develop a robust methodology and the experience of external experts has been used in order to make use of international best practice. Despite this, it is unrealistic to expect nowcast estimates to perfectly reflect changes in the distribution of income, particularly when examining smaller sub-groups of the population, so the estimates should be treated as providing an early indication of what the full survey-based data will show.

Further information is available in the Accuracy of the Statistics: Estimating and Reporting Uncertainty section of this Statistical Bulletin.

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8 .Background notes

  1. Today’s analysis, along with the accompanying "Nowcasting Household Income in the UK: Methodology, 2015 (251 Kb Pdf)" article, can be found on our website.

  2. The historical data in this article are based on the Effects of Taxes and Benefits on Household Income series produced by the Office for National Statistics, which itself is derived from the Living Costs and Food Survey (LCF). This series has been chosen for this article due to its long time series and its use as the primary input for the IGOTM model used for producing the 2014/15 nowcast estimates. Also, it allows the possibility of extending the work on nowcasting to indirect taxes and benefits in kind provided by the state.

  3. The period covered begins in 1977 because this is the period over which consistent data from the Effects of Taxes on Benefits on Household Income series are available.

  4. All income measures given in this article for the UK have been deflated to 2014/15 prices using an implied deflator for the household sector in order to give a better comparison of households’ standards of living. The figures are all given before housing costs.

  5. Glossary

    Disposable income: Disposable income is the amount of money that households have available for spending and saving after direct taxes (such as income tax and council tax) have been accounted for. It includes earnings from employment, private pensions and investments as well as cash benefits provided by the state.

  6. Equivalisation: The majority of figures in this release are based on equivalised disposable income. Equivalisation is the process of accounting for the fact that households with many members are likely to need a higher income to achieve the same standard of living as households with fewer members. Equivalisation takes into account the number of people living in the household and their ages, acknowledging that whilst a household with 2 people in it will need more money to sustain the same living standards as one with a single person, the 2 person household is unlikely to need double the income. This analysis uses the modified-OECD equivalisation scale (165.7 Kb Pdf).

    Equivalisation of disposable income

  7. Gini coefficients: The most widely uses summary measure of inequality in the distribution of household income is the Gini coefficient. The lower the value of the Gini coefficient, the more equally household income is distributed. A Gini coefficient of 0 would indicate perfect equality where every member of the population has exactly the same income, whilst a Gini coefficient of 100 would indicate that one person would have all the income.

  8. Median household income: The median household income is the income of what would be the middle household, if all households in the UK were sorted in a list from poorest to richest. As it represents the middle of the income distribution, the median household income provides a good indication of the standard of living of the “typical” household in terms of income.

    Median household income

  9. Retired persons and households: A retired person is defined as anyone who describes themselves (in the Living Costs and Food survey) as "retired" or anyone over minimum State Pension age describing themselves as "unoccupied" or "sick or injured but not intending to seek work". A retired household is defined as one where the combined income of retired members amounts to at least half the total gross income of the household.

  10. Use and users

    In measuring how living standards have changed over time, median household disposable income is widely regarded as one of the most important indicators (see for example, OECD, 2013; ONS, 2014, Stiglitz et al., 2009). As it represents the middle of the income distribution, the median household income provides a good indication of the standard of living of the “typical” household in terms of income. However, it is also desirable to have information on the whole distribution of household income and analyse not only a typical household but also those towards the top and bottom of the income distribution.

  11. A variety of inequality measures are calculated based on disposable income, including the most commonly used Gini coefficient. Together these measures provide evidence on how incomes are shared across households and how this is changing over time. However, one important limitation in using such measures as proxies for changes in material living standards is their lack of timeliness. Unlike macro-economic indicators such as GDP per head or Real Household Disposable Income (RHDI), which are typically available within a few months, statistics on the distribution of income in the UK and other countries are typically produced to a much longer timetable, reflecting to the complexity involved in collecting, processing and analysing household financial survey data. For example, our Effects of Taxes and Benefits on Household Income publication has historically been released in June, approximately 15 months after the end of the income reference period.

  12. Up-to-date measures of household incomes provide a valuable tool for evaluating the impact of tax and benefit policies and for informing wider public debate on living standards. In order to meet the considerable user demand for more timely data on household incomes, we have developed this new set of Experimental Statistics, produced using so-called "nowcasting" techniques.

  13. In February 2015, the UK Statistics Authority published their monitoring review on "The Coherence & Accessibility of Official Statistics on Income & Earnings". In that report, they noted that users had said “that a 15-month lag in publishing key income and earnings statistics means that the relevance to decision making is diminished almost before the statistics are released”. The Authority went on to recommend that “where data cannot be collected or compiled at the required frequency or timeliness, attempts to model or forecast and nowcast estimates should be considered”, and our current work exploring nowcasting of household income was warmly welcomed.

  14. Accuracy of the statistics: estimating and reporting uncertainty

    The nowcast estimates are subject to the same degree and types of statistical error as any other analysis based on survey data. In particular, as the LCF data is a sample survey, the estimates are subject to sampling error. Surveys gather information from a sample rather than from the whole population. The sample is designed carefully to allow for this, and to be as accurate as possible given practical limitations such as cost constraints, but results from sample surveys are always estimates, not precise figures. This means that they are subject to a margin of error which can have an impact on how changes in the numbers should be interpreted, especially in the short-term. Year on year changes in the estimates reported in this bulletin may not be greater than the margin of error. In practice, this means that small, short-term movements in estimates should be treated as indicative, and considered alongside medium and long-term patterns in the series in order to give a fuller picture.

  15. A 95% confidence interval is a range within which the true population would fall for 95% of the times the sample survey was repeated. It is a standard way of expressing the statistical accuracy of a survey-based estimate. If an estimate has a high error level, the corresponding confidence interval will be very wide. Estimates of the confidence intervals are provided in Table 6 from the reference table download (118 Kb Excel sheet).

    As well as sampling error, all statistics are also subject to non-sampling error. Non-sampling error includes all sources of data error that are not a result of the way the sample is selected. There are a wide number of different types of potential non-sampling error, including coverage error, non-response and measurement error.

    Using micro-simulation and nowcasting techniques to estimate distribution of income, provides an additional source of non-sampling error in the estimates. The simulation process can introduce sources of error due to, for instance, approximations in the simulation of tax benefit rules, adjustments for non-take up, uprating of financial parameters and socio-demographic characteristics to the simulation year or ignoring behavioural responses (see for example, Sutherland et. al, 2014). On the other hand, simulation can arguably improve the consistency of results relative to survey based estimates through simulating the exact rules of the tax and benefit system.

  16. Future plans for publication

    In line with UK Statistics Authority guidance, we will carefully evaluate these statistics to determine future plans. Consideration will be given to the quality of the estimates possible through nowcasting and the extent to which estimates produced with such methods are able to meet user needs. This will inform any future plans for publication, including the frequency and level of detail provided. Ahead of this evaluation, our current intention is to publish these provisional estimates on an annual basis, with the next release based on 2015/16 data published in Summer 2016.

  17. Related statistics and analysis

  18. The Department for Work and Pensions (DWP) publishes analysis each year on household income in their publication Households Below Average Income (HBAI). The latest edition of this publication, including data for 2013/14, was released 25 June 2015. This release is based on data from the Family Resources Survey (FRS) and focuses on the lower part of the income distribution.

  19. HBAI has a different focus from ETB, which is primarily focused on the redistribution of income through taxes and benefits across the income distribution. However, in order for both publications to be able to present a coherent narrative, some comparable statistics are presented in both bulletins, including median and Gini coefficient for equivalised disposable (net) income. Due to HBAI being based on a different survey, along with some methodological differences, HBAI and ETB estimates for these figures can differ slightly from each other. However, historical trends are broadly similar across the 2 sources.

  20. A comparison of ETB and HBAI income estimates was published in June 2015, as part of the Effects of Taxes and Benefits on Household Income, Financial Year ending 2014: Methodology and Coherence.

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  23. These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.

  24. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

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Contact details for this Statistical bulletin

Claudia Wells / Nathan Thomas 
hie@ons.gsi.gov.uk
Telephone: +44 (0)1633 455867