The Salary Calculator

Liberal Democrats pledge to lower income tax

by Admin

A reader has asked me about this campaign pledge from the Lib Dems, where they say they will increase the income tax personal allowance to £10,000 if they win the next election. They say this could mean an extra £700 a year for low- and middle-income voters.

Let’s look at the numbers and see if they are right. As you can see on The Salary Calculator “about” page, the current allowance is £6,475 for under-65s. Increasing this to £10k would give everyone an extra £3,525 untaxed, and for those in the 20% tax band this would be £705, matching what the Lib Dems claim.

However, they have to raise this extra money from somewhere – as you can see on their website they have listed some areas they might take the money from, including taking National Insurance on benefits in kind and second jobs. Also, they may lower the threshold between the 20% and 40% rates, meaning smaller savings for those in the higher bracket.

At first glance, those in the 40% tax bracket will save even more with this increase in personal allowance (up to £1,410!), but if the threshold were lowered this effect would be smaller, and as you can see on the Lib Dem website, they also talk about modifying tax relief so that pension contributions are only tax free on the 20% rate. As always, the devil is in the detail!

Needless to say, should they come to power The Salary Calculator will be updated when they make good on this campaign promise.

Tags: April 2010, election, income tax, Liberal Democrats, Pay As You Earn, pension, Pensions, personal allowance, tax rates, The Salary Calculator

Pro-rata calculations

by Admin

Recently, I’ve had a couple of requests from users of the site to have a pro-rata calculator on the site, so you can work out what your new pay would be if you go down to reduced hours or enter a job share of some sort. Unfortunately, I’ve not had time to make this new tool, but it is easy to use the existing calculator to work out your pro-rata pay.

For example, if you are working 20 hours a week instead of 37.5:

1. If you know the hourly rate for the job, use the Hourly Rate Calculator, enter that rate and 20 hours – the calculator will show you the take home pay.
2. If you just know the annual salary for 37.5 hours a week, first divide the salary by 37.5, then multiply it by 20. Enter this new salary into the normal calculator and it should give you the right information.

According to HMRC, tax, NI etc are all worked out the same whether you worked 37.5 hours to earn the money, or just 20 (or 1!). The above tricks can show you what you need to know until I have time to create a pro-rata calculator.

Tags: HMRC, income tax, pro-rata, tax rates, The Salary Calculator

New, higher tax rate

by Admin

From April 2010, new tax rates will take effect. Most of us won’t be affected by the changes, as they only affect those with annual income in excess of £100,000.

The first change is the creation of a new income tax band for taxable income above £150,000, which will be taxed at a rate of 50%. This will make a significant difference to anyone who does earn this much as they currently are paying only 40% on this income.

The second change is a reduction of the personal allowance of £1 for every £2 your income is over £100,000. Your personal allowance is the amount you are allowed to earn without paying tax – by reducing this allowance the government are able to take more tax off your hands. In fact, I have calculated that whereas currently for every extra £2 you earn over £100,000 you take home £1.20, those of you lucky enough to be in this pay bracket will be taking home only £0.80 of that £2 from April 2010.

The Salary Calculator will be updated with these new rates early in 2010 when the details of personal allowances and other thresholds for that tax year are made available.

More details are available on the HMRC website here (PDF).

Tags: 50% tax, April 2010, HMRC, Income Tax, income tax, Pay As You Earn, personal allowance, tax rates