In the UK, you pay tax on many things, and with the cost of living rising, these taxes are starting to make people feel the pinch.
Breaking down how much you pay via tax can demonstrate just how much of your income is lost and how much it raises the cost of living.
Naturally, people in different financial situations will pay different tax rates, meaning this breakdown will not reflect everybody’s situation. However, by using the UK average annual salary of £38,000, we’ll be able to set a barometer of how tax affects the average UK citizen.
Understanding your tax-free personal allowance
Before discussing how much of £100 earned you’ll lose because of tax, it’s crucial to make it clear you’re not taxed on all your income.
Currently in the UK, you have a tax-free allowance of £12,570. This means that if you don’t earn over this amount, you won’t have to pay any tax on this income. Any income over this threshold is what’s tax.
For our average earner, you’re only paying tax on £25,430. In other terms, you’ll only be paying tax for 66.9% of your income.
So, from your £100 earned, you’re only be paying tax on £66.90, meaning £33.10 is left alone.
Tax on income
There are multiple pieces of tax you’ll have to pay on your income that will reduce the amount you get to take home from £100 earned. The two most common types of taxes are income tax and national insurance.
For income tax, you’re taxed at 20% of your taxable income, providing you earn an average of £38,000. If your income is over £50,271, you’ll be on a higher tax band, paying 40% of your taxable income.
For £100 earned, you’ll be taxed 20% of your taxable income (£66.90). This means you’ll pay £13.38.
You’re taxed 13.5% of your taxable income for national insurance if you earn between £190-£967 a week. Because our average earner for this example makes around £730 before tax is applied, they’ll have to pay £13.5% on their taxable income for national insurance.
This means they’ll pay 13.5% of £66.90, which is £9.03.
So, after taking away both income tax (£13.38) and national insurance (£9.03) from £100, our average earner will have £77.59.
Optional tax on income
There are also a few more expenses that could come off an average earner’s income similar to taxes that should be considered.
Student loan repayments
The first is student loan repayments. An average earner of £38,000 may likely have gone to University to earn a degree and thus has to repay a student loan. The repayment terms will alter depending on the Student loan plan you’re on; however, because the most common is Plan 2, this is the one used for this example.
When on Plan 2, you’ll start making student loan contributions once you reach the salary threshold of £27,295 a year. This is 9% of your salary over £27,295. This means our average earner will pay 9% student loan of £10,705. This is 28.17% of their total income, so when converting it to £100 earned, they pay 9% of £28.17, which is £2.54.
When you subtract student loan repayments, you’re now left with £75.05.
Most people earning £38,000 a year will also make pension contributions, coming out of their monthly salary. The type of pension you’re paying for will alter what you pay, and if you’re only using a state pension, you won’t pay anything. However, most will have a workplace pension, where you contribute a percentage of your salary, which your employer at least matches.
Most people contribute 5% of their income to their pension, meaning from our £100 earned, £5 is taken from that.
This means after all income taxes and expenses, our average earner is left with £70.05 of their initial £100.
As well as taxes that come directly from your income, there are also plenty of other taxes you’ll have to pay monthly.
Two of the most common ones you can’t avoid are council tax on your home and road tax on your vehicle.
Council tax will differ drastically for everyone and will alter depending on where you live and what band your home is placed in.
There are 8 different council tax bands, and your home will be placed in one depending on its value. This value is based on what your home would likely have been sold for in 1991.
The most common council tax band is band D, and the national average you’ll have to pay a year if you’re in this band is £1,818. In reality, this number will be very different depending on your home’s location, but we’ll use this term for this example.
£1,818 is 4.78% of our average earner’s salary of £38,000. This means for every £100 earned, you’ll be paying £4.78 to council tax. This leaves them with £65.27 left from their starting £100.
Road tax is charged at a flat fee for the year, depending on if your car was registered after 2017, runs on petrol, and is worth under £40,000. For the average earner, all these parameters will be met. This will leave road tax at £165 a year if you pay it all in one lump fee.
When factored into the £100 earned, this only equates to 43p, but in reality, it’s still an expense that can factor into your budget. This leaves you at £64.84.
As well as these unavoidable taxes, you’ll also be taxed heavily on your utilities, such as gas, electricity and water.
For gas and electricity, which are usually paid for in the same bill, the tax rate is 5%. If you’re paying the average UK energy bill, which has risen to a large £1420 a year, £71 is tax.
When converted to our £100 earned, you’ll be paying £3.74 on your energy bill, with 18p of that being taxed.
Water bills are around £400 a year, and although you don’t pay tax on this, it’s still a necessary expense which will eat up your £100 earned. For your water bills, you’ll lose £1.05 of your starting £100.
When subtracting both these costs, you’re left with £60.05.
Other common taxes
As well as the taxes mentioned above, other taxes apply to common products and services an average earner is likely to use, which will eat away at your £100 earned.
Most items are taxed at 20% at the standard rate, meaning if you use your £100 earned to make a £5 purchase, the tax will contribute to £1 of that.
Some other commodities are taxed at an even higher rate, such as tobacco, alcohol, and petrol.
Even though you’ll be left with £60.05 of your initial £100 after essential taxes and expenses, you’ll still be paying extra for tax.
Tax isn’t a bad thing; it’s essential as it helps pay for various public services in the UK many people use frequently. However, it’s helpful to know how much you’re losing to tax to help you better budget and manage your money.
This example was for an average earner in the UK being taxed at average rates. It’s unlikely you’ll have the same tax because of your own circumstances, even if you are on £38,000 too. Use this to illustrate just how much money you earn is actually yours to spend freely.