Even if you’ve 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 better.
Using a Tax Calculator to Determine Your Net Salary
One of the key times you’ll need a tax calculator is when you start a new job.
Let’s say you’ve been offered a yearly salary of £50,000. You might think that’s a lot, but is it enough to support your lifestyle, especially if you’re moving to a more expensive area?
If you accept that £50,000 job, your monthly take-home pay would be about £3,128. This takes into account the £12,500 tax-free allowance, leaving £37,500 to be taxed at 20%, which results in a £7,500 tax liability. If you’re fresh out of university or relocating to the UK for a new job, remember that companies usually pay your net salary through the Pay As You Earn (PAYE) system. This means your income tax is deducted monthly, with adjustments made at the end of the year if you’ve overpaid or underpaid.
A tax calculator can also help figure out your National Insurance contributions. Out of your gross income, you get a tax-free allowance of £8,632. After that, you pay 12% up to £50,000, and 2% on anything above that.
Adjusting the Tax Calculator to Your Needs
The earlier example used figures from the 2019/2020 tax year for an employee in England without student loans, pension contributions, childcare vouchers, bonuses, company car benefits, or dividends. These factors can affect your actual net income.
For instance, if you have to repay a student loan under Plan 2 (post-2012), your net monthly income drops to £2,946. Contributing 10% of your gross salary to a pension scheme would result in a net income of £2,795, plus £1,000 in pension tax relief. If you receive a £1,000 yearly bonus, you’ll actually get about £580 after higher tax rates and National Insurance contributions. Making a pension contribution can help offset this.
The Importance of a Tax Calculator for Your Budget
As shown, a few adjustments can change your net salary from £3,128 to £2,795. Even though contributing to your retirement is a good move, it’s important to note that this is over 10% of your expected income that won’t be on your payslip, and you need to plan for that.
Using a tax calculator is crucial for knowing what to expect each month and for future planning. This is especially important for your first job to ensure you don’t have to go into debt to maintain your lifestyle, or at any time your tax situation changes. For instance, think about how a company car might affect your take-home pay, or how a job with a £5,000 lower salary could save you money on commuting and give you more time with loved ones. These are all important considerations that a tax calculator can help you weigh.
