Even if you have been at your job for a while, tax codes and personal situations are always changing. Using a tax calculator can help you plan and budget accordingly.
Using a tax calculator to determine your net salary
One of the most useful times you will need a tax calculator when you start a new job.
What does a yearly £50,000 salary represent in terms of monthly net income?
It may seem like a lot of money, but will it be enough to support your lifestyle if you are relocating to a more expensive area?
As you can see, if you accept a job making £50,000 gross, your monthly payslip should be £3,128.
That is after your tax free allowance of £12,500 has been taken into account, and the rest of your income, or £37,500 has been taxed at 20% (a £7,500 tax liability).
If you are just starting to work after uni, or are not from the UK and relocating there for a new job, note that companies pay your net salary on a Pay As You Earn, or PAYE system, where you pay your income tax monthly, then get an adjustment at the end of the year on your tax return, if you owe money or are owed a credit.
Credits can happen if you stop working half way through the year for example, as your tax free allowance has been spread over 12 months.
One way you could owe money is if you made more and got over your tax bracket but your employer took income tax based on the lower bracket.
You are also paying for National Insurance out of your gross income, with a tax free allowance of £8,632 then a tax bracket of 12% until £50,000, and 2% over that.
Adjusting the tax calculator to your needs
The above tax calculation was made with numbers from the current 2019/2020 tax year, for an employee living in England, with no student loans, pension contributions, childcare vouchers, bonuses, company car or benefits, or dividends.
It only takes into account the basics, and your actual net income may vary if you input any of the aforementioned factors.
Having student loans to repay on Plan 2 (after 2012) would reduce your £3,128 to £2,946 every month.
Contributing 10% of your gross salary into a pension scheme would mean a net income of £2,795, and £1,000 in pension tax relief.
A £1,000 yearly bonus really means £580 in your pocket because by making £50,000, you are just at the threshold of the 40% tax bracket. So the extra £1,000 get taxed at 40%, plus 2% for NI.
You can see how you can offset that by making a pension contribution.
The importance of a tax calculator for your budget
As you can see, with just a one little tweak, we went from a net salary of £3,128 to £2,795.
Granted, it was by making great progress in saving for retirement, this is over 10% of your expected income that would not be on your payslip at the end of the month, and you should plan accordingly.
Hence the importance of using a tax calculator, where, in just a few clicks, you can know what to expect and plan for your month and future.
This is valid whether this is your first job, and you need to ensure you won’t have to go into debt to sustain your lifestyle, or at any point where your tax situation changes.
For example, do you know what would be the impact of accepting that company car, or what if you took a job that paid £5,000 less but allowed you to save on commute and spend more time with your loved ones?
All valid considerations that a tax calculator will make easy to weigh.
First off, thank you for sharing this post, Pauline! Personally, the use of a tax calculator has been really useful and it would be a great tool for those who are doing their taxes on their own. Filing and doing taxes is not an easy job and everyone knows that. What’s good about the tax calculator is that it can be adjusted to our specific needs. Thank you for breaking this down so well. Cheers!