This study aims to examine the club convergence of market and disposable income inequality and the formation of convergence clubs across a sample of 36 European countries for the period 1997–2023. The log test developed by Phillips and Sul (2007) and the modified log t-test by Tomal (2024), which models structural shocks and the changing number of convergence clubs over time, were used to analyse the convergence of inequality indicators. The findings of the log-t test indicate that there is no absolute convergence in market and disposable income inequality and that three convergence clubs have formed for both indicators. The modified log-t test, however, suggests that the number of clubs increases in market income inequality during crisis periods, whilst the number of clubs decreases in disposable income inequality. This finding confirms the success of the redistribution mechanism in ensuring stability during crisis periods. The determinants of the cluster formations identified based on the results of the modified log-t test were analysed using the dynamic ordered panel logit method. Unlike the literature, path dependence and spatial diffusion were also taken into account in determining income inequality cluster formation. The findings suggest that path dependence, spatial diffusion and post-communist membership increase the likelihood of being in the high market income inequality club, whilst the population aged 65 and over reduces the likelihood of being in the high market income inequality club. No significant effect of trade openness, level of industrialisation or urbanisation on the formation of the market income inequality club was found. Furthermore, the findings indicate that economic growth, post-communist membership and public expenditure increase the likelihood of being in the high disposable income inequality club, whilst the population aged 65 and over reduces the likelihood of being in the high disposable income inequality club. However, urbanisation and EU membership have no significant effect on the formation of the disposable income inequality club. The negative effect of the squared lag of club membership on club formation for both inequality indicators suggests that members of the extreme clubs tend to move to the intermediate clubs over the long term.