You see a job advertised offering £36000 pa (per annum, meaning per year). Wow that’s £36000 divided by 12 equalling £3000 per month, thank you very much. However, this is gross pay, before deductions for income tax, national insurance and pension contributions. You will find that your £3000 per month will be closer to £2000 per month, this is net pay.
You will have a tax code. For most it is currently 1250L. Forget the L, it’s the 1250 we’re interested in here. This means that you can earn, from all income, £12500 per year (just added a zero onto the 1250) without paying income tax. Previously it was 1185, so last year you could earn £11850 per year without paying income tax. Every penny above this £12500 will be taxed at 20%, for every £1 you earn 20p goes in income tax.
It is likely that you will be enrolled onto a pension scheme. Money will be taken from your salary to pay for pension contributions. This money is deducted before calculating your income tax (and so income tax will be lower because it is 20% of a smaller figure). Calculating pension contributions is a little tricky. If you contribute 10% on an auto-enrollment scheme then you will pay 10% of (monthly salary - £511.33). So with £3000 per month, that is
10% of (£3000 - £511.33)
= 10% of £2488.67
= £248.87
However auto enrolment is not the only type of pension scheme, you will need to check with your employer.
This blog is about income tax, so we will assume, for this example, that your pension contributions are £250 per month. Income tax is based on year earnings, and the threshold to pay income tax is £12500. We will examine this on a monthly basis, so your income tax threshold is £12500 / 12 = £1041.67. You only pay 20% on the income above £1041.67 per month.
So your £3000 gross monthly pay. Let’s subtract the pension contributions:
£3000 - £250 = £2750
£2750 is £1708.33 above the threshold of £1041.67
We pay 20% of this £1708.33 in income tax:
Income tax = 20% of £1708.33 = £341.67
So we have deductions of pension + income tax = £250 + £341.67 = £591.67 deducted per month.
If you’re fortunate enough to earn above £50000 per year, then everything above the £50000 will incur 40% income tax. For above £150000 per year then it’s 45% for everything over the £150000.
Income tax is not the only deduction from your monthly salary. There is also national insurance, which I may look at in a future post. In this example (£36000 per year) it would be about another £275 deduction from your wages per month.
A useful tool can be found at https://www.thesalarycalculator.co.uk/ to work out how much you should expect to see each week or month, see ‘The Take-Home Calculator’ at the link.
Phil Roberts
Maths & Statistics Adviser
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