29 August 2019
You may think that getting a pay rise will help ease your financial woes, but beware before you start spending – a number of tax traps make a pay rise less positive for your bank balance than you might think.
According to Brewin Dolphin, one of the UK’s leading wealth managers, someone earning £45,000 a year and getting a £5,000 pay rise will see a net increase of £3,400 in their bank account, a percentage increase of 68%. However, if you earn over £50,000 and get a pay rise of £5,000, your new salary of £55,000 will see a net increase of £1,652. That is a percentage increase of just 33%. This is because moving from the basic rate of tax to the higher rate of tax will mean you pay 40% on anything you earn above £50,001 a year.
The tax implications of a pay rise are even greater for families with children. Once earning over £50,000 a year, you trigger the high-income child benefit tax charge. This is one per cent of the child benefit amount received for each £100 of income over £50,000, meaning that those earning over £60,000 have a charge equal to the full amount of child benefit. Someone with three children and a gross salary of £45,000 will take home £36,639 per year, including child benefits of £2,501. But someone earning £60,000 will take home £43,339, with nothing at all in child benefit payments*.
Lee Clark, financial planner, at Brewin Dolphin says: “Whilst getting a promotion at work is something to be celebrated, the increased responsibility and pressure that comes with a pay rise may not always be worth it for some people. Our tax system appears to be simple but once the costs of savings, national insurance, child benefit and tax credits are taken into account, as well as the erosion of certain personal allowances, pay rises may be less of a bonus than they appear to be.”
In addition to the loss of valuable tax breaks, savers who move into the higher rate band of tax stand to lose out as the rate of Capital Gains Tax also increases from 10% for gains within the Basic Rate band, up to 20% for anything over. Property owners should also beware of the cost of a pay rise as gains on second homes are subject to higher rates of 18% for basic rate taxpayers and 28% for high rate taxpayers.
Similarly, the rate of dividend tax could also increase if you move up a tax band – the rate of tax is 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and 38.1% for a additional rate tax payer. In addition, the Personal Savings Allowance, which exempts income tax on savings income for a basic rate taxpayer is £1,000, which reduces to £500 for higher rate taxpayers.
Lee adds: “Higher earners, especially those with children, should definitely be aware of losing out on valuable tax breaks if they get a promotion or new job with a salary increase. Increased tax on dividends and on savings income may also wipe out any gains people think they may have made.”
Tax deductions for each salary bracket
| Gross Salary | £45,000 | £50,000 | £55,000 | £60,000 |
| Income Tax | £ 6,498 | £ 7,498 | £ 9,496 | £11,496 |
| National Insurance | £ 4,364 | £ 4,964 | £ 5,064 | £ 5.164 |
| Net Salary | £34,138 | £37,538 | £40,439 | £43,339 |
| Child Benefit* | £ 2,501 | £ 2,501 | £ 1,251 | £0 |
| Total | £36,639 | £40,039 | £41,691 | £43,339 |
*Assuming three children
How much in your pocket?
| Current Gross | New Gross | Gross Increase | Net Increase | Percentage increase in pocket |
| £45,000 | £50,000 | £5,000 | £ 3,400 | 68% |
| £45,000 | £55,000 | £10,000 | £ 5,052 | 51% |
| £45,000 | £60,000 | £15,000 | £ 6,701 | 45% |
| £50,000 | £55,000 | £ 5,000 | £ 1,652 | 33% |
| £50,000 | £60,000 | £10,000 | £ 3,301 | 33% |
| £60,000 | £100,000 | £40,000 | £23,200 | 58% |
| £100,000 | £150,000 | £50,000 | £23,996 | 48% |
*This tax year, April 2019 to April 2020, the personal allowance – the amount you can earn without tax – is £12,500. The basic rate of tax is 20 per cent from £12,501 to £50,000. The higher rate of tax is 40% for those earning £50,001 to £150,000. Above that, the additional rate of tax is 45%.
PRESS INFORMATION
For further information, please contact:
Richard Janes richard.janes@brewin.co.uk / Tel. +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: (0) 20 3201 3026
Anita Turland: anita.turland@brewin.co.uk / Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
Camarco: brewin@camarco.co.uk / Tel: +44 (0)20 3757 4980
NOTES TO EDITORS
Disclaimers:
- The value of investments can fall and you may get back less than you invested
- The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
- Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser
- Brewin Dolphin is authorised and regulated by the FCA
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £44.1* billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £39.1* billion on a discretionary basis.
Our intermediary business manages over £13* billion of assets for over 1,500 advice firms either on a discretionary basis or via our Managed Portfolio Service.
In line with the premium we place on personal relationships, we’ve built a network of 31 offices across the UK, Jersey and Dublin, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
*as at 30th June 2019