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With the new tax year having started yesterday we find ourselves facing a complete overhaul of the tax system that will affect (pretty much) every one of use. Well, it’s not exactly a complete make-over, but still relevant enough to have a noticeable impact. Since my post “What the taxman claims” still holds the pole position of popular posts (awesome alliteration!), I figured it was time to update the spreadsheet that comes with that post to reflect the new tax regime. A version 2.0 if you like…

But before I’ll share a link with you that you can use to download the new version of the tax spreadsheet, a short summary of what exactly has changed since we last wondered how much tax the government was getting from us:

• Personal Allowance: This tax-free allowance was increased from previously £5,225 to £5,435 - a 4% increase to keep up with inflation, if you really wanted to know. As long as you’re under 65 years old this is the amount you don’t owe the government a penny on (per tax year).
• Tax rates: As of yesterday there is no such thing as a 10% tax rate anymore. It has been completely abandoned in favour of reducing the basic tax rate from 22% to 20%. No changes to the 40% tax rate though I’m afraid - except for the threshold after which you will have to pay it. Once your personal allowances is fully used, you can expect to pay 20% tax on the next £36,000 you earn a year. Hence, any income that goes beyond £41,435 (£1,500 higher than before!) will be taxed at 40%.
• National Insurance: In line with the tax amendments, National Insurance contributions were adjusted as well. The basic threshold now lies at £90 p.w. (or £4,680 p.a.) below which you don’t have to make any contributions at all. After that, you are expected to pay 11% of your gross pay up to a limit of £770 p.w. (£40,040 p.a.) followed by 1% of everything that exceeds £40,040. Last year’s 1% threshold was fixed at £34,840 which means that people can now expect to pay slightly more NI as the 11% rate applies to a further £5,200.
• Student loan repayments: No change here Earnings threshold is still sitting at £15,000 p.a. beyond which point you are expected to pay 9% of the remainder (i.e. everything beyond 15k) to settle your debt.

That’s a very brief summary of what’s going to change this (tax) year. The only additional change I have made to the spreadsheet concerns non-taxable benefits. If you are, like me, fortunate enough to be in a position were you get certain benefits from your employer which are deducted from your salary pre-tax, then you can now take these into account when calculating your annual tax due. Just add them into the cell below the bonus payments and it will be automatically deducted from your gross annual salary and not taken into account for the tax, NI and student loan calculations.

And now here it is - the one thing you’ve been waiting for while I’ve been rambling about boring tax changes: the new spreadsheet! Download it here.

A year ago on Simple Pound: Investment Choices - Index Funds

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Note: an updated version of this post for 2008/09 can be found here.

When I first read through my job offer I couldn’t have been happier with my stated salary and benefits package and I starting daydreaming immediately. However, once I realised how much money would actually end up in my account and how much of that nice sum would go into Her Majesty’s pockets, life suddenly seemed a lot crueller. It took me a while to understand how the UK tax system works and I thought I would share my newly-gained knowledge with you!

First things first: income tax. Any UK resident in employment has a personal allowance of at least £5,225 for the tax year 2007/08 - you can get more if you’re older than 65 or blind, but I’m assuming the majority of my readers won’t be… This personal allowance means that you won’t pay tax on the first £5,225 you earn per tax year (starting April 6th, 2007).

The next £2,230 you earn during 2007/08 will be taxed at a starting rate of 10%. The basic rate of 22% covers all money earned that exceeds £7,455 (= £5,225 + £2,230) up to a total amount of £39,825. That means, for the next £32,370 earned after you covered your personal allowance and starting tax rate in full, you will pay 22 pence of every pound earned to the government. Anything that exceeds the £39,825 will be taxed with the higher rate of 40%.

You can find an overview of the 2007/08 tax rates here. But beware that HM Revenue & Customs quotes the values without taking account of the personal allowance. The values in their table should look familiar if I’ve done a good enough job of explaining how I got to the abovementioned values.

Once you’ve paid all your tax duties, there’s another institution patiently waiting in line to grab their share of your money: National Insurance. This money is used to fund the NHS, social security, job seeker’s benefits and the like. National insurance contributions highly confused me - but, good news, I’ve got them figured out!

The two important values for your NI contributions are the earning threshold and the upper earning limit. The earning threshold is currently set at £5,225 (does that value look familiar to you? ) and you are exempt from NI contributions up to this amount. For any annual income that lies between the earning threshold and the upper earning limit of £34,840 you need to contribute 11% of your salary (if it’s any consolation: your employer needs to pay 12.8% for your whole salary, without caps). Anything beyond £34,840 is taxed at 1%, which means that those poor folks paying 40% income tax get at least a little relief with NI.

Now you are probably thinking: “Those numbers really confuse me… I just want to know what money is gonna come into my account each month… Does it have to be this difficult?” The answer is - No.

I’ve been procrastinating hugely and set up an Excel sheet that will give you a detailed breakdown of all the things I’ve discussed in this post - but with numbers relevant to your situation! All you have to do is download the spreadsheet here, type in your annual salary (as given in your contract) and any bonuses you might be expecting. Once you’ve done that and also resisted the urge of changing the formulae behind the individual cells, you’ll see a breakdown of

• your share of taxes at 10%, 22% and 40% (if applicable)
• your total tax contributions for the tax year 2007/08
• your annual salary after tax deductions
• your NI contributions at 11% and 1% (if applicable)
• your annual NI contributions
• your annual salary after tax and NI contributions
• and finally: your net monthly salary, i.e. the money that should end up in your hands/pockets/wallet/purse

Hope you enjoy playing with the Excel sheet… I certainly do…

Once I’m actually receiving that salary I’ve based my own calculations on, I will let you know whether my predictions came out right! Any questions? Leave a comment.

Update: Upon request I have updated the Excel sheet to include student loan repayments. According to Student Finance Direct you must earn at least £15,000 per annum to be required to pay back your student loan. If you exceed this amount, you need to repay 9% of everything beyond this threshold, i.e. if you get £20,000 a year, you are required to pay 9% of (£20,000 - £15,000 =) £5,000 back to the loan company.

The spreadsheet does not account for your individual circumstances. That means, if the calculated amount exceeds what you have left to pay back, you’re lucky!

Since the student loan repayments won’t necessarily apply to everyone out there who might think this spreadsheet could be of any use, you will see two different numbers for monthly salaries in the spreadsheet now: before and after student loan repayments.

Enjoy!

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