With the cost-of-living crisis escalating thanks to rising inflation and soaring energy bills, it’s important to be in the know about how much income tax you pay.
It’s also vital to be prepared for tax rises in the future.
Rebecca O’Connor at Interactive Investor said: “Tax isn’t the most exciting topic to think about but it has a very real impact on your earnings. It’s important to get a handle on it so that you’re in the know about what you will take home each month and what you have to spend.”
How much income tax do I pay?
To find out how much income tax you pay, try our income tax calculator. It will show you how much income tax you can expect to pay over the next tax year (or scroll down to use our calculator for the current tax year). It will also show you how much you can expect to pay in National Insurance.
It's important to note if you earn less than £12,570 per year, you will not pay any income tax. And now that the National Insurance threshold has been increased to the same level, you won't pay any National Insurance either if you earn less than £12,570.
Once you have a clear picture of your earnings once tax has been taken off, you can know exactly what you will receive on payday to allow you to be in control of your budgeting.
Income tax calculator to 2022/23 tax year
You just need to type in your annual salary and the calculator will show your take-home income per month and per week, once income tax - and National Insurance (NI) - have been deducted.
You will also be able to see a breakdown of the income tax and NI applied to your level of earnings.
How is income tax calculated?
The income tax you pay depends on how much you earn. On earnings above a certain amount, income tax is tiered.
Everyone can earn up to £12,570 without paying any income tax at all. This is known as the ‘personal allowance’.
You’ll currently pay a basic rate of 20% between £12,571 and £50,270 and 40% on earnings between £50,271 and £150,000. Those with an income of over £150,000 a year pay a top rate tax band at 45%. But following changes announced in the Autumn Statement on 17 November, from April 2023, the point at which someone started paying the top rate of income tax will be lowered from £150,000 to £125,140.
Thresholds are set to be frozen until 2028. This means that for those whose wages rise could find themselves pushed into a higher tax band by stealth and have to pay more income tax.
On 23 September 2022, former Chancellor Kwasi Kwarteng announced that these rates were set to change from April 2023. The basic rate of income tax was set to drop to 19%, and the higher and top rate bands were set to be replaced with a single higher rate of 40%. However after strong criticism, the government u-turned on the decision to scrap the 45% top rate of income tax just ten days after it was announced. On 17 October 2022, the reduction of the basic rate of income tax was also scrapped by new Chancellor Jeremy Hunt.
Income tax bands are different if you live in Scotland.
To determine your own level of tax, HM Revenue & Customs (HMRC) issues a personalised tax code.
It is made up of letters and numbers and will be displayed on your pay slip, P60 as well as on your annual letter from HMRC entitled the “coding notice”.
Is income tax going up?
While income tax rates aren't going up, the Government has frozen income tax thresholds until 2026. This means that people who have an increase in salary that moves them across a threshold will be pulled into higher tax brackets and pay higher tax bills.
O’Connor said: “Frozen thresholds sounds harmless, but actually, if your income goes up - you could end up being dragged into paying tax if you don’t currently, or paying higher rates of tax.
“It’s important to make sure you’re clued up on the latest tax changes so you can plan ahead and not get caught short.”
Net pay going down? Here are five tips on how you can reduce your costs elsewhere to recoup the losses:
1. Be a savvy supermarket shopper
Since grocery bills are noticeably higher, it pays to find ways to cut the cost of your supermarket shop. Bargains are often hidden away on the bottom shelf so make sure you don’t just select goods at eye level. And look for bargain non-branded items when you’re buying pasta, rice, butter and cheese. Don’t forget to check the ‘yellow sticker’ bargains for things already on your shopping list.
2. Stick to the list
Plan menus carefully and buy only what you need at the supermarket to avoid overspending – and waste. The charity WRAP estimates that households throw away 6.6 million tonnes of food each year and that 70% of that could have been eaten. This equates to £500 worth of edible food being thrown away by households each year.
3. Sign up to reward schemes
Supermarkets and high street retailers offer loyalty schemes that earn shoppers discounts or points that you can turn into vouchers. All the big brand names, apart from Aldi, have a reward scheme. Asda is offering a trial in a few stores at the moment. On the high street Boots and Superdrug reward schemes are worth considering.
Since most schemes are offered through membership cards, you can double up on rewards if you have a credit or debit card that earns you air miles, cashback or points on your spending.
4. Shop around
Price comparison websites are not just for energy bills and insurance. If you’re looking for something specific – perhaps a new vacuum cleaner or washing machine - use online comparison tools, such as pricerunner.com. You can not only find the best price for more than 2.2 million products, but you can also read reviews from other users to make sure you're making a wise purchase.
5. Join the cashback club
Using cashback websites for shopping can boost savings. Instead of visiting a retailer’s website to buy something, you go to a cashback app or website, search for the company that you want to buy from and click on its logo to be directed back to the shop. The app or website usually earns commission from what you have bought because you have clicked through from its site, and it then refunds some to you.
How much you earn depends on what you buy and who from, but you could make £100s if used wisely. You can get rewards as gift cards for shops, or cash paid into a bank account. The main cashback sites are Quidco and TopCashback.
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