THE ESSENTIAL BENEFITS OF USING A TAX CALCULATOR

THE ESSENTIAL BENEFITS OF USING A TAX CALCULATOR

Even if you’ve been at your job for a while, tax codes and your personal circumstances are always changing. A tax calculator can help you plan and budget effectively.

Using a Tax Calculator to Determine Your Net Salary

A tax calculator comes in handy, especially when you start a new job. For example, what does a yearly salary of £50,000 actually mean for your monthly net income? It might seem like a lot, but will it cover your costs if you’re moving to a more expensive area?

With a £50,000 gross salary, your monthly take-home pay would be roughly £3,128. This is after considering your tax-free allowance of £12,500, with the remaining £37,500 taxed at 20%, resulting in a £7,500 tax liability.

If you’re new to the UK job market, know that companies pay your net salary through the Pay As You Earn (PAYE) system. You pay income tax monthly, and at the end of the year, you may get an adjustment on your tax return if you owe money or are owed a credit. Credits can occur if you, for instance, stop working mid-year since your tax-free allowance is spread out over 12 months. Conversely, you might owe money if you earned more and moved into a higher tax bracket, yet your employer taxed you based on a lower bracket.

In addition to income tax, you’re also paying National Insurance (NI) from your gross income. You have a tax-free allowance of £8,632, then you pay 12% on earnings up to £50,000, and 2% on anything above that.

Adjusting the Tax Calculator to Your Needs

The tax calculation above uses figures from the 2019/2020 tax year and is for an employee in England with no student loans, pension contributions, childcare vouchers, bonuses, company car benefits, or dividends. This is a basic calculation, and your actual net income may vary if you factor in any of these elements.

For example, if you have student loans from Plan 2 (after 2012), your monthly net income would drop from £3,128 to £2,946. Adding a 10% contribution to a pension scheme would lower your net income to £2,795 but earn you £1,000 in pension tax relief. A £1,000 annual bonus is effectively £580 in your pocket due to the 40% tax on earnings at the £50,000 threshold, plus 2% for NI. You could counter this by increasing your pension contributions.

The Importance of a Tax Calculator for Your Budget

A tax calculator demonstrates how a small change, like a 10% pension contribution, can reduce your net salary from £3,128 to £2,795. While this significantly boosts your retirement savings, it’s a notable reduction in your immediate take-home pay. Planning accordingly is crucial.

This is relevant whether it’s your first job and you’re trying to avoid debt or at any point when your tax situation changes. Consider the impact of accepting a company car or taking a lower-paying job that saves on commuting costs and gives you more time with loved ones. A tax calculator helps you evaluate these options easily.