Something that comes up time and time again when it comes to salary increases: will I actually be much better off?
First of all, let’s clear up the financial myth that still confuses people.
Income tax and national insurance is not necessarily one rate for your whole salary. This means you don’t suddenly lose a higher percentage of ALL of your earnings to tax when your salary crosses a certain tax bracket.
Income tax percentages and earnings
Tax Rate | Earnings |
0% | £0 - £12,570 |
20% | £12,571 - £50,270 |
40% | £50,271 - £150,000* |
45% | over £150,000 |
*Earnings between £100,000 and £125,140 see an effective rate of 60% tax due to the tapered personal allowance kicking in.
So, if you earn £55,000, many people assume you’re taxed 40% on the entire £55,000. Thinking like this can be dangerous. I’ve known people be cautious of taking salary increases or a higher wage at a new job, because they thought they would be worse off. This goes to show how little some people trust the government.
Now on the face of it, jumping from 20% to 40%, on any amount of money, seems a lot. Effectively your rate of income tax doubles.
But something practically everybody forgets when it comes to tax is National Insurance.
You should get into the habit of knowing what your Income Tax rate is AND your National Insurance rate. When you add both together, the jump in tax deductions from a basic rate to a higher rate earner suddenly changes dramatically.
Luckily, changes to National Insurance were recently made in July 2022 that make it easier to compare income tax rates with National Insurance rates.
National insurance percentages and earnings for PAYE workers
Rate | Earnings |
0% | £0 - £12,570 |
8% | £12,571 - £50,270 |
2% | over £50,270 |
National Insurance rates are typically expressed in weekly amounts. For everyday folk like you and I, this is pointless and confusing. The table above calculates national insurance for a yearly rate – much easier to refer to when looking at your income tax rate alongside it.
These rates are for people employed by a company and are known as Class 1 contributions
Self-employed national insurance contributions are slightly different and are known as Class 2 and Class 4 contributions.
So, putting together these two tax deductions, let’s compare average earners with higher earners.
Earning up to £50,270 a year? You pay a total of 28% on anything over £12,570.
Earn over £50,270 a year? You pay the same as above PLUS 42% on anything over £50,270.
Despite most people thinking that your tax rate DOUBLES when you become a higher rate earner, it really only increases by just 50%
Yes, 42% is still a lot of tax to pay…but bear in mind you’re paying more than just 20% on basic rate earnings in the first place.
Summary
Know your rates of tax! While National Insurance isn't classed officially as 'tax', you need to keep things as simple as possible when understanding how higher earnings can be affected by rates of tax.
For the first time, national insurance and income tax earning brackets are the same. So its easy to remember the key numbers.
