If you have the potential to take your annual salary from £50,000 to £55,000, you may be wondering if the pay rise is worth it because of the higher tax threshold.
While it sounds odd to pass up the possibility of a pay rise, there are tax and benefit considerations worth pondering. You want to make sure you get enough reward for potentially harder work or longer hours.
Below we discuss what you might consider if you are eligible for a pay rise that would take your annual salary above £50,270. This is the limit at which higher tax rates and national insurance schemes kick in – or the £50,000 limit at which you could lose some child benefit.
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Tax breakdown for income of £50,000
Most adults in the UK have a personal allowance of £12,570 per annum. You do not have to pay income tax or national insurance on income below this amount.
Once your income exceeds £12,570, you become taxable.
The basic income tax rate is 20% for annual income between £12,571 and £50,270 in England, Wales and Northern Ireland, although Scotland has different tax brackets.
You also pay national insurance contributions of 12%, making your total effective tax rate 32%.
However, income above £50,270 will be subject to a 40% income tax and 2% National Insurance contributions – taking your tax rate on that income above the threshold to 42%.
The table below shows your net pay – after tax – on various salary amounts above £50,000.
Your net pay – after tax – on various salary amounts above £50,000
Source: desalariscalculator.co.uk
Read more: How much has the UK minimum wage increased?
Will I be better off?
Making more money means your take-home pay will increase, so yes, you’ll be better off.
But you also pay more tax. For every £1 earned in England, Wales and Northern Ireland above £50,270, 42 pence goes to income tax and national insurance. This is before the deduction of student loans, if you are still repaying student debt.
You also start to lose child benefit on income above £50,000. This is an important bottleneck for people with children. Child benefit is £1,248 a year for the first child and £826.80 a year for each subsequent child.
The High Income Child Benefit Levy (HICBC) means that the amount you receive from child benefit decreases if one parent earns more than £50,000. You lose the benefit altogether once individual income reaches £60,000.
The table below shows the take-home pay for a parent with two children whose income is between £50,000 and £65,000. We’ve also included calculations if you repay your student loan on plan 1, where repayments are 9% of income over £22,015.
Your net pay for a parent with two children with an income between £50,000 and £65,000 [Sources: thesalarycalculator.co.uk/gov.uk]
As the table above shows, a pay rise from £50,000 to £55,000 would mean that you would only be better off on £158 a month if you had two children, as you would lose some child benefit.
If you also paid back your student loan, you’d be better off £121 a month.
Do you want to know your net salary after tax? Then use our free tax calculator
Reduce your salary to below € 50,000
For people with an income of more than £50,000, it might be worth looking at paying amounts that go into a pension. By doing this you may be able to keep the full child benefit and avoid paying 40% income tax on any additional income above £50,270.
The downside is that you will only have access to the money from your pension when you turn 55. So if you need an income increase now, you have to accept that you’re going to pay more tax.
How to deposit into a pension
If you are employed, your employer may offer pensions as an option to sacrifice your salary. This means that your salary will be reduced and that the remaining amount will go into pension. So if you earn £55,000 your adjusted wage will drop to £50,000 and £5,000 will go towards a pension.
You can also deposit a company pension without a wage sacrifice. Your employer simply withholds monthly contributions from your total pay and deposits it into a pension, while you also pay contributions.
If you are self-employed, you can deposit a private pension. The amounts you deposit will be recorded on your annual tax return, reducing your total profit for the year. So if you earned £55,000 after expenses and paid £5,000 towards a pension, HM Revenue & Customs would classify your total income as £50,000, leaving you a base taxpayer and allowing you to claim all necessary child benefits.
So is a pay rise of more than £50,000 worth it?
An income increase of more than £50,000 would increase your take-home pay, but you would also pay more tax. At least 42 pence of every £1 you earn over £50,270 goes to tax and you lose access to child benefit (if applicable).
If you have two children, you lose almost £950 a year in child benefit on an income of £55,000. However, the savings are even greater with three children, when you would miss out on £1,318.
Consider paying more into your pension to keep your income at £50,000, but accept that you can’t get this money until you’re at least 55 years old.
