We were looking at our cars for last week's Finance Fridays and checking out the new MOT rules. For this week we are thinking about pay rises. For most of us an increase in salary would be most welcome but you may be worse off financially because of it. It is worth thinking about how a higher wage would impact on tax rates and any government benefits you may receive.
Low income benefits – In many areas Universal Credit has been introduced. This takes over from previous benefits such as Housing Benefit, Income Support, Child Tax Credit and Working Tax Credit. The circumstances in which you are entitled to these benefits can depend on the individual and their family status (i.e if they have a partner and/or child) and not just on a single income figure. If you get a pay rise you may not be entitled to the extra money from Universal Credit but also the extra benefits from it. These can be free school meals and either free or reduced health costs for dental treatment, eye tests and glasses, and also prescription charges.
Higher rate – If you go over the income threshold of £46,350 per annum you start to pay 40% tax on earnings above this amount. However, it also means you can be taxed in other ways. When the £1,000 tax-free savings interest rule was introduced it applied to basic rate taxpayers. If you go into the 40% bracket the amount of savings interest you can receive tax-free drops to £500. Any interest above this amount would be taxed at 40%.
For those who have shares and receive money from dividends could also be hit. You can receive up £2,000 of dividend income tax free but once you start being a higher rate taxpayer the percentage of tax you pay goes up. For dividend income of over £2,000 basic rate taxpayers are charged 7.5% tax but higher rate taxpayers have to pay 32.5% tax. Similarly it you need to pay capital gains tax for basic rate taxpayers it is 10% but the higher rate is 20%.
Another thing to think about is the marriage allowance. If you have a spouse who doesn't take any or the full amount of the personal allowance of £11,850 per annum you can add on the extra to your personal allowance and get the tax benefit from it. However this only applies to basic rate taxpayers so once you become a higher rate taxpayer you won't be able to claim this.
Child Benefit – This used to be an universal benefit but now it has an upper earnings limit. This starts at £50,001 for one parent. Once your salary reaches £50,001 for every £100 earned then 1% of the child benefit amount will be taken off. If one parent earns above £60,000 the Child Benefit will be stopped entirely. For the first child the payment is £20.70 a week or £1.076.40 for 52 weeks. If you have a second child the additional amount if £13.70 a week so for two children this adds up to £1,788.80 a year. Add on a third child and the Child Benefit totals £2.501.20 a year.
Have you been worse off after a pay rise? Would you ask your employer not increase your salary?
I'm taking part in the Monday Money linky with Lynn from Mrs Mummy Penny, Faith from Much More With Less and Emma from EmmaDrew.Info
Low income benefits – In many areas Universal Credit has been introduced. This takes over from previous benefits such as Housing Benefit, Income Support, Child Tax Credit and Working Tax Credit. The circumstances in which you are entitled to these benefits can depend on the individual and their family status (i.e if they have a partner and/or child) and not just on a single income figure. If you get a pay rise you may not be entitled to the extra money from Universal Credit but also the extra benefits from it. These can be free school meals and either free or reduced health costs for dental treatment, eye tests and glasses, and also prescription charges.
Higher rate – If you go over the income threshold of £46,350 per annum you start to pay 40% tax on earnings above this amount. However, it also means you can be taxed in other ways. When the £1,000 tax-free savings interest rule was introduced it applied to basic rate taxpayers. If you go into the 40% bracket the amount of savings interest you can receive tax-free drops to £500. Any interest above this amount would be taxed at 40%.
For those who have shares and receive money from dividends could also be hit. You can receive up £2,000 of dividend income tax free but once you start being a higher rate taxpayer the percentage of tax you pay goes up. For dividend income of over £2,000 basic rate taxpayers are charged 7.5% tax but higher rate taxpayers have to pay 32.5% tax. Similarly it you need to pay capital gains tax for basic rate taxpayers it is 10% but the higher rate is 20%.
Another thing to think about is the marriage allowance. If you have a spouse who doesn't take any or the full amount of the personal allowance of £11,850 per annum you can add on the extra to your personal allowance and get the tax benefit from it. However this only applies to basic rate taxpayers so once you become a higher rate taxpayer you won't be able to claim this.
Child Benefit – This used to be an universal benefit but now it has an upper earnings limit. This starts at £50,001 for one parent. Once your salary reaches £50,001 for every £100 earned then 1% of the child benefit amount will be taken off. If one parent earns above £60,000 the Child Benefit will be stopped entirely. For the first child the payment is £20.70 a week or £1.076.40 for 52 weeks. If you have a second child the additional amount if £13.70 a week so for two children this adds up to £1,788.80 a year. Add on a third child and the Child Benefit totals £2.501.20 a year.
Have you been worse off after a pay rise? Would you ask your employer not increase your salary?
I'm taking part in the Monday Money linky with Lynn from Mrs Mummy Penny, Faith from Much More With Less and Emma from EmmaDrew.Info
Wow, I didn't realise there was so much to consider when you are fortunate enough to earn a higher wage! It doesn't seem fair to lose out on child benefit either. Thanks for sharing!
ReplyDeleteSome really interesting points here! It just goes to show that a promotion might not always be the golden ticket that you can sometimes think it is. And of course, that's before you think about the added stress, potential extra hours, etc. Great post :-)
ReplyDeleteI was caught out by the £50k child benefit thing when I was working at EE. I was in the telegraph talking about it when the change started 5 years ago!!
ReplyDeleteInteresting how people get hit hard when tipping into higher rate tax. I'd be grateful to get 40% relief on my pension payments though! Thanks so much for joining in with #MondayMoney, enjoyed reading your post.
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