Diverse livelihood strategies have significant socio-economic implication for the livelihood of the rural household. The level and the type of income diversification depend on the accessibility and availability of different income sources. The present research examines the determinants of rural household income with specific objectives to study and identify the different livelihoods sources, and to assess their contribution towards household income. For this purpose a survey was conducted in district Shangla of Northern Pakistan covering 323 households. Using different statistical techniques and econometric models the study finds that ownership of land, livestock, forest, farm machinery, level of education, skill possession, vocational training, access to extension services, village organization membership, decision making power at community level, working relation, labour organization, saving, and remittances significantly contribute towards household income. Diversification of livelihood sources was found common and the reasons responsible for this were the adoption of improved verities of maize crop, improved breeds of livestock, high paid non-farm jobs, seasonal nature of agriculture, and surplus agriculture labour. Significant change was observed after the diversification of household income both from farm and non-farm sources. The result of t-test of diversity indexes was found significant. Average annual income per household before the diversification was Rs. 2,52,578, which increased to Rs. 4,33,390 after the diversification of income, showing an increase of 71.58%. The contribution of the farm livelihood sources towards income of the households after the diversification of income was 30.60% and non-farm income was 69.40%. Farm sources of livelihood contributed more to income inequality while the non-farm sources reduce income inequality among the rural household. The-Gini coefficient found for household income was 0.401. The quantile results show that there is high inequality of income among the rural households. The top quintile households hold about 46 percent of the total income. This growing inequality in income leads to further aggravate the poverty in rural areas. There is great potential for the development of both farm and non-farm livelihood sources but most of the rural dwellers are not equipped to exploit these livelihood sources and hence forced to live below subsistence level. The potential areas that need investment are; dairy farming, improvement in pasture land, increasing herd size, and most importantly development of non-farm sector, which is always neglected while formulation rural development strategies, needs to be included in the policy debates.