FROM Saturday, millions of Brits will get a hefty pay rise thanks to changes to the ways that tax is calculated.
April 6 is the beginning of a new tax year and new rules mean that most of us can take more of our pay home tax-free.
As a result, even if your salary stays the same – you’ll end up with more cash in your pocket each month.
For someone on the average UK salary – which the ONS says is £29,588 a year – this means an extra £155 of take-home pay a year.
Sarah Coles, a personal finance analyst explains: “Normally if you’re getting excited about tax thresholds, it’s usually a good sign you ought to get out more. However, this tax year, big rises in income tax thresholds are great news for millions of people – who’ll pay up to £520 less tax.
“The National Insurance thresholds are moving too, which will eat into some of the gains, but will still leave us better off overall. So even if tax changes don’t usually float your boat, the new thresholds are something you can get (relatively) excited about.”
How much better off will I be?
The good news is that almost everyone will be better off under the new rules, but because there are two different changes happening at once it can be difficult to calculate how much you will save.
The only people who won’t benefit are those who earn under £8,424 a year. As they don’t pay NICs or Income Tax – they won’t be impacted by the changes at all.
Working out what you’ll get is made even more complicated by the fact that factors such as your pensions contributions and your student loans can make a difference to the precise figure.
The easiest thing to do is to use a calculator such as this great one from MoneySavingExpert.com.
To get an accurate figure, make sure you have all the relevant data handy such as your tax code, pensions contributions and you know which type of student loan you have.
For a quick guide – here’s the likely impact of the changes for different salary bands.
- £8,424 or less – no change
- £8,424.01 – £8,632 – up to £25 better off
- £8,632.01 – £46,350 – £155 better off
- £46,350.01 – £50,000 – up to £520 better off
- £50,000.01 – £100,000 – £520 a year better off
- £100,000.01 – £123,700 – £260 to £520 a year better off
- Over £123,700 – £260 a year better off
How do the changes work? – Income tax
The thresholds have changed on income tax, meaning that anyone who pays this tax will be better off overall.
The only people who won’t gain are those who earn under £11,850 each year – as they will continue to pay no income tax at all, so will be no better or worse off.
Last year, you could earn up to £11,850 tax-free annually – but from Saturday, this rises to £12,500 a year.
This means that everyone who earns between £11,850 and £100,000 a year will end up taking home an extra £130 a year.
Anyone who earns over £46,350 will also benefit from from the higher rate threshold moving from £46,350 to £50,000 a year.
This means that they can earn an extra £3,650 a year paying only 20 per cent rather than 40 per cent.
In real terms, this means a saving of £730 a year.
Anyone who earns under £100,000 a year also benefits from the personal allowance – so they’ll also get an extra £130 a year – meaning a total saving £860 from the income tax changes.
Those earning over £100,000 a year are affected by something called the “taper band” which means that they’ll get less personal allowance and make less overall.
Laura Suter, personal finance analyst at AJ Bell, explains: “Because you lose tax-free personal allowance, at a rate of £1 for every £2 you earn over £100,000, your effective tax rate on this band of earnings is 60 per cent.
“When the personal allowance increases to £12,500, this means the 60% per cent effective tax rate will apply to all earnings from £100,000 up to £125,000, rather than just the money between £100,000 and £123,700.”
These ultra high earners will still be better off overall, but they’ll save less than the group below.
Of course, the changes to Income Tax need be set against the changes to NICs, which will cost some people money.
Suter continues: “Before people start planning how to spend their windfall they need to check the small print, as those benefitting from the higher-rate band increase will be hit by an increased National Insurance bill.
“This move wipes out a big chunk of the tax gain from the income tax break.”
In Scotland, the thresholds are slightly different. Everyone will still make money, but the total amounts will be slightly different.
You can calculate how much income tax you will pay using this MoneySaving Expert calculator and ticking the “I live in Scotland” box.
How do the changes work? – National insurance contributions
The other big change is to National Insurance contributions (NICs).
In the 2018/19 tax year the threshold for making National Insurance Contributions has risen from £8,424 to £8,632.
This means that anyone who earns between £8,434 and £46,350 will be better of by £25 a year.
Anyone earning below £8,434 will be no better or worse off, as they will continue not to pay any contributions.
But National Insurance is more complicated than Income Tax, because the amount you pay goes up and then down depending on earnings.
In the 2018/19 tax year, everyone paid 12 per cent NICs on earnings between £8, 424 and £46,301 – but would pay just 2 per cent on earnings over the top threshold.
Now the threshold for paying 2 per cent has risen to £50,000.
That means higher earners will have more income that falls in the 12 per cent bracket rather than the 2 per cent one.
So anyone who is earning over £50,000 will pay an extra £365 a year in NICs at the top end, but gain £25 from the lower threshold changes meaning they’ll pay £340 more in total.
Those earning between £46,350 and £50,000 will lose up to £340 depending on their specific salaries.
It’s not all good news as Council Tax bills are set to rise by £78 a year from this Saturday.
Plenty of other things are getting more expensive too – from household bills to energy tariffs. Here’s how to beat the hikes.
Meanwhile, Sky, BT and the AA are among the best firms to haggle with – and you could save HUNDREDS of pounds.