Difference Between Personal Income and Personal Disposable Income

Personal income and personal disposable income are two terms that should be distinguished accurately since they are used interchangeably despite their differences. The key difference between personal income and personal disposable income is that personal income refers to an individual’s total earnings in the form of wages, salaries and other investments whereas personal disposable income refers to the amount of net income available to an individual to spend, invest and save after income taxes are paid. Thus, the tax payment can be identified as the main distinguishing factor between personal income and personal disposable income.

CONTENTS
1. Overview and Key Difference
2. What is Personal Income
3. What is Personal Disposable Income
4. Side by Side Comparison – Personal Income vs Personal Disposable Income
5. Summary

What is Personal Income?

Personal income refers to an individual’s total earnings in the form of wages, salaries, and other investments. It is the sum of all the incomes received by an individual over a period of time. Personal income can be classified as active or passive income.

Active Income

Active income is the income resulting from any business activity in which the individual materially participates.

• Wages, salaries, bonuses, commissions or other payments for services rendered
• Profit from a trade or business in which you are a material participant
• Gain on the sale of assets used in an active trade or business
• Income generated from intangible property

Passive Income

This is the income resulting from any business activity in which the individual does not materially participate.

• Earnings from a business that does not require direct involvement from the owner
• Interest income from deposits and pension
• Dividend and capital gains from securities or commodities
• Royalties earned on intellectual property

Personal income is taxed at a varying level according to the income. The method of calculating tax is different in each country. However, in general terms, taxes are levied on net income (gross income less allowable tax savings) and capital gains of individuals. Below are some examples of minimum and maximum personal tax rates in countries.

• Argentina – 9 -35%
• Hong Kong – 0-15%
• Nigeria – 7 -24%
• United States – 0-39.6%

What is Personal Disposable Income?

Personal disposable income is referred to as the amount of net income available to an individual to spend, invest and save after income taxes are paid. It can be calculated by subtracting income taxes from income.

Personal Disposable Income = Personal Income- Income Tax Payment

E.g. an individual earns an income of $175,000, and it pays tax at 25%. The disposable income of the individual is $131,250 ($175,000 – ($175,000* 25%)). This means that the individual has $131,250 for spending, investing and saving purpose.

Individuals consume goods and services (necessities) such as food, shelter, transportation, healthcare and leisure while also saving a portion or funds. They also undertake investing activities to earn returns. When the disposable income for all the individuals or households is collated, the national disposable income for a country can be arrived at.

Personal disposable income is among the key economic indicators in a country. Since personal disposable income is different from one individual to another, it cannot be used to compare disposable income among countries. For this reason, ‘Disposable income per capita’ is calculated for a country by adding the collective income of all individuals of the country less taxes and dividing the sum by the country’s population.

Disposable Income per Capita = Total Disposable Income/ Total Population

What is the difference between Personal Income and Personal Disposable Income?

Summary – Personal Income vs Personal Disposable Income

The difference between personal income and personal disposable income is that personal income refers to the total earnings obtained as active or passive income while personal disposable income is arrived at after considering tax payments. Thus, personal disposable income is smaller and depends on the personal income. Tax evasion on personal income is illegal and the payment is unavoidable. Tax rates applied on personal income is subjected to change over time and are also based on the country of residence.

Reference:
1.”Passive Income.” Investopedia. N.p., 02 Sept. 2015. Web. 28 May 2017. <http://www.investopedia.com/terms/p/passiveincome.asp>.
2.”Tax – Tax on personal income – OECD Data.” TheOECD. N.p., n.d. Web. 29 May 2017. <https://data.oecd.org/tax/tax-on-personal-income.htm>.
3.”Disposable Income.” Investopedia. N.p., 05 Nov. 2014. Web. 29 May 2017. <http://www.investopedia.com/terms/d/disposableincome.asp>.

Image Courtesy:
1. “United Kingdom personal income by sex” By Delphi234 – Own work (CC0) via Commons Wikimedia
2. “Distribution Of Income In Greece” By Thanatos –  (CC0) via Commons Wikimedia