Simple Pound

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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