Congratulations! You just got a kind of pay rise. Thanks to changes in how much we get taxed, you’ll be taking home a little more of your salary this month.
That’s the good news. Unfortunately, a big chunk still disappears before it gets to your bank. And it’s not always easy to understand where the money goes, making it even trickier to spot an errors (which happen more often than they should).
So here’s a quick guide to explain why you’re getting to keep more money this month, how to work out what your take-home pay, and how to check you’re paying the right amount of tax.
Why you’ll keep more from your payslip this month
Most earners don’t get taxed on the first chunk of their salary, known as their “personal allowance”, and good news, this goes up from £11,000 to £11,500 on 6th April 2017.
It’s anything you earn after that which is taxed. So earnings between £11,501 and £45,000 are taxed at 20% (the “basic rate” of Income Tax). So that means you now earn an extra £500 without having any tax deducted – worth £100 in your pocket this year. Don’t spend it all at once.
There’s also a change in level when the 40% “higher rate” of Income Tax is charged. This will now be taken from earnings above £45,001 (up to £150,000) rather than £43,001. So if you earn more than £45,000 you’ll get to keep an extra £200.
Added to the increased personal allowance and you’re up by £300 a year.
I can’t imagine many top earners read the blog, but if you earn more than £150,000 (!!) then your wages over that amount get taxed at 45% (FYI this is known as the additional rate of tax).
How much of your wages do you really get to keep
I think most of us open up our payslips and see the column with all the money that’s taken away and don’t quite get why so much of our earnings disappear before we get paid.
The bulk of the wages you don’t keep go to one of these:
- Income Tax
- National Insurance Contributions
- Workplace pensions
- Student loan repayments
- Season ticket loans or other workplace benefits
It usually feels like you’re losing far more money than is fair, but it’s often not as much of your money as you think.
This interactive infographic I’ve produced has a few examples of how much goes on Income Tax and National Insurance on different salaries. Essentially the blue sections are money you get to keep.
I’ve not included pensions or student loans as they’ll vary for everyone, but for these examples tax and NI will apply for pretty much everyone.
How to work out what you’ll keep from your pay
The salaries I used above are just examples – your’s will be different depending on what you earn. The easiest way to understand exactly how much you’ll get to keep from your salary is to use an online tool.
I really like the Salary Calculator which breaks down your weekly, monthly and annual take home pay (your “net” pay) based on your salary (your “gross” pay).
You can also add in extras such as workplace pension and student loans. It’s pretty good for figuring out if a pay rise is going to make much difference too!
Why you need to check your Tax Code
You’ll see a “Tax code” on your payslip, probably some numbers followed by an L or another letter. Most people will have a code of 1150L for 2017/18 – representing the £11,500 personal allowance mentioned earlier.
It might be another number if you owe money from a previous year or have a second job, or it could be a different letter depending on your situation – but mistakes do get made as my wife seems to continuously find every year.
It’s worth checking this is right as you could be paying too much or too little – and you’ll have to sort out the difference at the end of the tax year next April, which can be a nightmare.
If you want to know more, read this guide to tax codes on the HM Revenue & Customs site.