9 things to do when your income rises

So, you’re enjoying more income. Congratulations!
Is this your first job (taking your income from zero to hero), or did you land a promotion you’ve wanted for some time, or are your efforts now giving you a nice rise in income? Well however you’ve done it, well done to you!

Savour the moment

There are few better feelings than having your efforts recognised and seeing the value of your work go up. Be sure to celebrate this moment in a way that feels right for you – whether that’s a meal out with family or friends, or even a holiday, if your new budget will stretch to that.

Taking the next steps

Once you’ve celebrated your increase in income, you’ll need to think about how you’ll
allocate your extra income between:
● Buying more (or better) basics for your day to day life
● Building more funds for emergencies or for your longer-term life goals for yourself or your loved ones
● Having more fun and a few more treats today
But before you can do that, you’ll need to get clear on how much of your new income you’ll be able to direct to what you want. Only then will you be sure that your new spending plan is built on solid ground. So, that’s what we’ll look at now.

What is your new net income?

Getting more income is great news. And, while we all know that we won’t get to see all of our
pay increase in our pockets, we might expect to receive most of it, after tax and National
Insurance. Unfortunately, this is not always the case.
Tax complexities, you could very well lose between 32% and 75% of a pay rise because of the lumpy nature of our tax and benefits system. So, let’s look at the checks you need to make before you start spending your new earnings.

You could end up paying up to a 75% effective tax rate!

We will cover:

• Reductions in state benefits
• Student loan repayments
• Child benefit tax reductions
• Child maintenance payments
• High earners tax allowance
• Building cash reserves
• Accelerating debt repayments
• Protect your income
• Review your life goals

1. Check for reductions in any state benefits

Some state benefits reduce as your income rises and the net effect in some cases could be that you only take home 30% or less of a pay rise. The benefits system is complex and how much of your pay increase you keep will depend on your personal situation. The good news is that as your earnings exceed benefit entitlement levels you’ll keep significantly more, between 58% and 68%, of any pay increase. If you currently receive income-dependent state benefits, check how much you’ll receive in the future here. Even if you’ve not claimed state benefits before, check your entitlement. And remember: some benefits extend a long way up the income scale – especially for working parents. Also, be sure to advise relevant agencies of changes to your financial circumstances here. Deliberate failure to do so is benefit fraud.

2. Check your student loan payment

If this applies to you, you’ll need to factor this in when thinking about what you’ll get as your take home pay.
Younger graduates
For younger people in England and Wales, you’ll typically make loan repayments of 9% on your earnings above a ‘threshold’ amount. The precise amount of your loan repayments, and the earnings level you need to reach before you start repaying, depends on when you started your course. If you started your course of study after 1 September 2012, you’ll start to repay your loan once your gross earnings (before tax) exceed £26,575 per year.
Older graduates
If you started studying before 1 September 2012, your earnings threshold is £19,390 per year (unless you started before September 1998, in which case you might have a mortgage style loan). For more details on this and the various rules that apply to students in other parts of the UK, start here. You can’t avoid loan repayments, but the amounts you pay might be reduced if you receive childcare vouchers. And rest assured that if, in the future, your income was to fall below your threshold amount, your loan repayments would stop. So, this is a much ‘kinder’ type of loan compared to others.

3. Watch out for child benefit tax

If you’re a parent and you or your partner’s income is over £50,000 per year… this could affect you. With income over £50,000 per year, child benefits will start to be taxed away. And it’s completely taxed away if your income exceeds £60,000.
Super tax!
The result, depending on how many children you support, is an effective tax rate (on pay increases of just over £50,000) of somewhere between 50% and 75%! More details are available here.

You may be able to reduce this tax with pension contributions but there are further pension benefit traps for the unwary if you get this wrong. So, if you think this issue could apply to you, seek good quality financial advice.

Child benefit is taxed when you earn over £50K

4. Check your maintenance payments

If you make spousal or child maintenance payments, this is for you. A substantial increase in your income should be a trigger to consider, very carefully, what
you do on this front. If you have a family-based arrangement with your ex-partner, you could simply agree on a new payment with them.
Legal advice
Consult a solicitor if you wish to explore a ‘clean break’ arrangement where you provide a one-off lump sum to your former partner in lieu of all future payments. Check with your solicitor about updating any court order that contains previous agreements on child maintenance payments or if stepchildren are involved. This is a complex and emotionally charged area and more guidance can be found here.

5. Check your tax allowance 

If you’re a high earner, this tax trap could affect you.
That’s because, if you earn more than £100,000 per year, you’ll start to lose your tax-free personal allowance. What’s more, you could lose it altogether once your earnings exceed £125,000 per year (2023/24 tax year). That means, on your earnings in this band, you’d pay an effective rate of tax (and national insurance) of 62%. You might be able to make additional pension contributions to cut this tax bill significantly. But you’ll need to understand what limits there might be on your access to those funds and on the amounts you can pay in. What’s more, if you earn over £240,000 per year you could be further restricted on what you can save into pensions. So, professional advice is essential in this area. If you earn over £100 K per year, you'll start to lose your tax-free allowance

6. Accelerate your debt repayments

If you have any ‘expensive’ debts to pay down, this is for you. Debts like overdrafts, credit cards, and store cards, can cost you a lot if you don’t pay them off quickly. So, for example, just £4,000 of expensive debt charging 15% p.a. will cost you £600 a year if you don’t start paying it down.
Debt repayment
So, if your new take-home income allows you to pay off some expensive debt, it might make sense to do so before increasing spending or looking at longer-term savings. Why pay lenders more in interest charges if you can keep that money for yourself? Your new income might help you qualify for a Salary Finance loan, click here to see if you’re eligible.

We cover debts and debt repayment in more detail in our Money Insights Box Set: Season 1.

£4,000 of debt charging 15% p.a. could cost you £600 per year

7. Build your cash reserves

If you had cut your spending to the bone before this pay increase, now might be a good time to put the odd luxury back into your budget. But don’t let your spending get out of control – and hold on to any valuable cost-cutting habits.
Coping with the unexpected
And, if you don’t have one already, now could be a good time to build yourself a nice reserve of readily accessible funds – to draw on as you need to. Having a cash reserve to cover those inevitable emergencies that crop up means not having to use expensive credit cards or overdraft borrowing in the future.

8. Protect your income
Your increased pay will hopefully remind you of the significant financial value you provide to yourself and any loved ones you support. So, it makes sense to cover yourself against a breakdown in your earnings capacity due to illness or disability.
Make sure the income doesn’t stop if you do
Although none of us think a calamity will happen to us, because the potential impact on our wellbeing is so high, it makes sense to offload the risk to an insurance company. The good news is, because these risks are normally low, the costs of insuring against them are extremely low too. Talk to your employer to find out what cover they already provide for you – or what products they offer at a competitive cost. You can then decide what further insurance, if any, you need to take out.

9. Review your life goals

If, after checking everything up to this point, you know that you’ll have some usable extra income… it’s worth taking some time to think about how you might use it. Perhaps you want to spend more on things for today – but you might have some longer-term goals that you need to save for.
What’s important to you?
A first home, a bigger home, further education, support for a loved one, or a dream holiday. Whatever it is, the first thing you need to do is decide on your goals. So, write them down and put some rough costs and timescales against them too. Then, think about how you’ll build the funds you need for those goals.
And...feel free to spend the rest! OK, well we know you don’t need our permission to go shopping… But it can feel good when you’ve got your finances sorted and you’re then able to give yourself that permission. So, there’s really not much more to say here. We’re certainly not going to give you guidance on what to buy or where from. That’s really up to you. Enjoy!