This is the starting point in improving your financial health. Before you start jumping into the “juicy” mortgages, ISA’s and pensions topics, you need to understand / acknowledge where you are now.
Most people know their income – they wait for that balance to arrive in their account on a given date every month. Do you know what the mechanics are of arriving at that figure? Maybe not.. what’s your tax rate? What’s your pension contribution? How much are you saving or adding by making that contribution? Do you have other deductions in that figure? How much do you need to earn before these dynamics change when you change tax rate? Furthermore … once the cash is in your bank account, do you know where it all goes?
If the answer to some or all of the above is “I don’t know” – that’s fine…. that is exactly why you are (and should) be reading this article. Let’s break it down…
Monthly Gross Salary / Net Income
Gross Salary – your contractual annual salary divided by 12 (unless you are paid four weekly / weekly in which case the
Net Income – the amount of cash which arrives in your bank account post tax, National insurance and any other company deductions.
The first key point of information is here is being aware of tax brackets. Why … Because this drives my advice thereafter.
£0 – £12,000 – the first £12,000 of income you earn in the UK is tax free.
£12,000 – £50,000 – any amount earned within this tax bracket is taxed at 20%.
£50,000 – £100,000 – any amount earned within this tax tax bracket is taxed at 40%.
£100,000 – £125,000 – if you are lucky enough to earn within this Tax bracket this what I call no mans land. Your tax rate on any earnings within this range is 66%.
£125,000 – £150,000 – any amount earned within this tax bracket is taxed at at 40% (again … confusing right?!)
£150,000+ – any amount earned in excess of £150,000+ is taxed at 45%
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