Singapore in Numbers - Disposable Income

Regardless of how high or low a persons’ reported income is, nobody gets to keep the entire amount. In fact, reported income may not be a good indicator of personal wealth. Disposable and Discretionary incomes may be more meaningful.

Disposable income refers to the income remaining after government deductions are accounted for. While Discretionary income refers to income remaining after paying for government deductions AND current living expenses (loans, bills etc.). discretionary income is a subset of disposable income. By definition, Discretionary Income is a subset of Disposable income.

While discretionary income offers the most accurate indicator of personal wealth, it is subject to many uncertainties and variables; such as an individual’s choices, lifestyles, obligations and other factors. Disposable income, on the other hand, offers an objective point of reference; after all, no one (or almost no one) can evade government sanction deductions.

Source - IRAS

Understanding Disposable Income in Singapore

Most countries define disposable income as income less personal income taxes; because that is the only government sanction deductions relevant to wage earners. However, Singapore imposes an additional deduction on personal income, the Central Provident Fund (CPF). The CPF is a mandatory social security savings scheme funded by contributions from employers and employees. It is a key pillar of Singapore’s social security system, and serves to meet members’ retirement, housing and healthcare needs.

Personal Income Tax in Singapore

Singapore takes a progressive approach to personal income tax where tax rates are tiered - charging higher tax rates for higher brackets of income; not unlike what many other countries do.

  • Personal income tax charged at the lower brackets could be as low as zero for the first $20,000 earned

  • But become increasingly higher with higher income brackets; up to 22% at the highest bracket (for any income earned beyond $320,000)

  • Based on data from KPMG, even at 22%, Singapore has one of the lowest personal income tax rates among high income countries

  • Singapore collected over $10.7B or 2.4% of GDP in personal income tax in FY2017.

Singapore's Social Security Savings Scheme - Central Provident Fund

Contribution rates differ by age; most contribute 37% of their wages to the CPF; 20% from the employee and 17% from the employer. Only the first $102,000 of annual wages are subject to CPF contributions.

One very interesting aspect of the CPF system is that 20% employee contribution is deducted from employee’s reported salary; while the 17% contribution borne by the employer is over and above the employee’s reported salary. A such, many employees may not realize that their employers pay them 17% more than their reported salary. As a result, using the revised total income of 117% of reported salary as the base, CPF deductions amount to about 32% of employee salaries (not the reported 37%).

Note also that the CPF contribution rates are significantly higher than personal income tax rates at any income bracket. In fact, CPF contributions for FY2017 amounted to over $37.2B; or almost 50% of total government taxes collected. That is no small amount.

Combined Impact on Disposable Income

The combination of both deduction has a very distinct impact on tax payers across the spectrum of income brackets; most notably:

  • The lower income brackets appear to experience the highest deductions; between 32-36% of annual income. This remains quite consistent all the way till $100,000 annual income.

  • Beyond $100,000 in annual income, the deductions start to progressively fall as a percentage of total annual income. At $1,000,000 in annual income, total government deductions amount to only 20%.

  • At the lower income brackets (<$100,000 in annual income) most the deductions are due to CPF contributions.

  • While at the higher income brackets (>$100,000 in annual income); CPF deductions begin to fall and personal income tax rates start to rise as a percentage of annual income

Key Observations and Considerations

Data seems to suggest that government policies are deducting a larger proportion of annual income from those in the lower income brackets (<$100,000) than for those in higher income brackets. Consequently, disposable income amounts to only 62-68% of annual income for lower income groups; as opposed to 78-80% for those who earn more than $300,000 annually.

Food for thought:

  • The higher deduction rates for the lower income groups are largely driven by CPF contributions, and this was intended to help members fund future retirement, housing and health care needs. However, for certain households, this could also mean not having enough to meet current day needs

  • With one of the lowest income tax rates in the world among high income countries and lower net income deductions for the higher income groups, could raising the income tax rates be an alternative to funding future government expenditures (as opposed to GST)?

  • Are the higher income deductions on the lower income groups a contributing factor to the widening income inequality in Singapore?

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