Why Do I Pay More Tax When I Get a Pay Rise?

Introduction

Getting a pay rise should feel like good news. However, many people are surprised when their take-home pay does not increase as much as they expected. This is because a higher salary can push you into a higher tax bracket or affect other deductions, such as National Insurance or student loan repayments.

If your payslip shows more tax being taken after a pay rise, it does not mean you are being unfairly taxed. It simply reflects how the UK’s tax system works. This article explains why your tax increases when your income rises, how tax bands are applied, and what you can do to make sure you are paying the right amount.

How Income Tax Works

The UK operates a progressive tax system, which means that the more you earn, the higher the percentage of tax you pay on portions of your income. Everyone has a personal allowance, which is the amount you can earn before paying tax. For the 2024 25 tax year, that allowance is £12,570.

Income above that threshold is taxed in bands:

• 20% (Basic Rate): Income from £12,571 to £50,270

• 40% (Higher Rate): Income from £50,271 to £125,140

• 45% (Additional Rate): Income above £125,140

Your tax is calculated gradually across these bands, not at one single rate. When you receive a pay rise, the extra earnings may move part of your income into the next band, increasing your total tax bill.

Example of How a Pay Rise Affects Tax

Suppose you earn £45,000 a year and receive a £5,000 pay rise, bringing your salary to £50,000.

Before the pay rise:

• The first £12,570 is tax-free.

• The next £32,430 (£45,000 £12,570) is taxed at 20%.

After the pay rise:

• The first £12,570 is still tax-free.

• £37,430 (£50,000 £12,570) is taxed at 20%.

You are still within the basic rate band, so you pay slightly more tax overall, but your take-home pay increases.

If your new salary were £55,000, then £4,730 of your income would fall into the 40% tax bracket, meaning that only that portion is taxed at the higher rate. You do not lose your entire 20% rate or pay 40% on all your income.

The “Higher Tax Band” Misunderstanding

A common misconception is that crossing into a higher tax bracket means all your income is taxed at the higher rate. This is not true. Only the amount above the threshold is taxed at the higher rate.

For example, if your income rises from £50,000 to £51,000, only £730 of that new income is taxed at 40%. The rest remains taxed at 20%. You are always better off financially after a pay rise, even if you enter a higher tax band.

National Insurance Contributions (NICs)

Another reason your take-home pay might not increase as much as expected is National Insurance. NICs are also based on earnings bands, with different rates applied above certain thresholds.

For employees:

• You pay 8% on earnings between £12,570 and £50,270.

• You pay 2% on earnings above £50,270.

If your salary rises, more of your income is subject to National Insurance, which adds to the total deductions from your pay.

Other Factors That Can Affect Your Take-Home Pay

1. Student Loan Repayments

If you are repaying a student loan, your repayment amount increases as your income grows. For example, under Plan 2, you pay 9% of earnings above £27,295. A higher salary means higher repayments.

2. Pension Contributions

Many employers use a percentage of your salary to calculate pension contributions. A pay rise increases the amount you contribute, reducing your net pay. Although this lowers take-home pay, it boosts your pension savings.

3. Company Benefits

If your pay rise comes with additional taxable benefits, such as private healthcare or a company car, your tax code may change to collect the right amount of tax on these benefits. This can also affect your monthly deductions.

4. Tax Code Adjustments

Sometimes HMRC adjusts your tax code after a pay rise, particularly if you have multiple sources of income. This ensures the correct amount of tax is collected overall but can cause a temporary increase in deductions.

Why You Might Pay More Tax Than Expected Initially

When you first receive a pay rise, your payroll system may recalculate your year-to-date income and adjust your tax accordingly. This can result in a one-off higher deduction as the system balances what you should have paid up to that point in the tax year.

From the next pay period onward, your deductions should stabilise to reflect your new salary correctly.

Example Scenario

Imagine James earns £40,000 per year and is promoted to £52,000 halfway through the tax year. His employer updates his salary immediately.

Because James’s total projected earnings now cross into the higher-rate bracket, his payroll adjusts his year-to-date figures. His next payslip shows a higher-than-usual tax deduction as PAYE catches up.

By the following month, his payslips return to normal, and his take-home pay increases in line with his new salary.

How to Check If You Are Paying the Right Amount of Tax

1. Check your tax code: It should reflect your personal allowance and any benefits. Most employees have code 1257L unless HMRC has adjusted it.

2. Use HMRC’s tax calculator: You can estimate your expected take-home pay online.

3. Review your payslip: Make sure your gross pay, tax, and National Insurance are calculated correctly.

4. Contact HMRC or an accountant: If something looks wrong, it is better to clarify it early.

The Role of an Accountant

An accountant can review your pay and tax deductions to ensure they are accurate. They can also help you:

• Understand how a pay rise affects your tax position

• Check if you are entitled to any tax reliefs

• Manage higher-rate tax if you have multiple income sources

• Ensure your tax code is correct

For higher earners, professional advice can also help with tax planning, pension contributions, and charitable giving to make the most of your income.

Conclusion

If you pay more tax after a pay rise, it is usually because you are earning more and moving into a higher tax or National Insurance bracket. The increase in deductions is proportional to your higher income, and you still take home more money overall.

Understanding how tax bands work helps avoid confusion and ensures you can plan your finances effectively. Always check your payslip and tax code, and seek advice from an accountant if you believe you are paying more than you should.