How much of a pay rise do you actually keep?

On a typical public sector salary in England, Wales or Northern Ireland, you keep about 72p of each extra pound before pension and student loan, because 20 per cent goes in Income Tax and 8 per cent in National Insurance. Add a public sector pension contribution and a Plan 2 student loan and the cash you keep falls to around 55p to 60p. Above £50,270 the combined Income Tax and National Insurance rate rises to 42 per cent, and between £100,000 and £125,140 it reaches 62 per cent.

Marginal rates

The figure that matters for a pay rise is your marginal rate: the share of the next pound that goes in deductions. It runs higher than your average rate, because the first £12,570 of your pay is free of Income Tax and employee National Insurance.

Income (England, Wales, NI)	Income Tax	Employee NI	Combined
£12,570 to £50,270	20%	8%	28%
£50,271 to £100,000	40%	2%	42%
£100,001 to £125,140	60% effective	2%	62%
Over £125,140	45%	2%	47%

The 60 per cent band comes from the personal allowance taper: you lose £1 of allowance for every £2 of adjusted net income over £100,000. The £100,000 tax trap covers it in full.

A student loan sits on top of the table. You repay 9 per cent of income above your plan’s threshold, and a further 6 per cent if you also have a postgraduate loan. Someone on a basic-rate salary above the Plan 2 threshold of £29,385 therefore pays 37 per cent on each extra pound before pension.

How the pension changes the picture

Public sector pension contributions come out before Income Tax is worked out, so each pound you pay in saves you tax at your marginal rate. National Insurance and student loan repayments are not reduced.

Part of a pay rise therefore goes into your pension, and the contribution costs you less than face value. The money is not lost either: in most public sector schemes it builds up pension benefits worth far more than the contribution.

Worked example: NHS band 5 progression

Say you are an NHS nurse in England moving from the band 5 entry point of £32,073 to the intermediate point of £34,592 after two years. That is a rise of £2,519. Both salaries fall in the 8.3 per cent NHS pension tier. You have a Plan 2 student loan.

	£32,073	£34,592	Difference
Pension (8.3%)	£2,662.06	£2,871.14	£209.08
Income Tax	£3,368.19	£3,830.17	£461.98
National Insurance	£1,560.24	£1,761.76	£201.52
Plan 2 student loan	£241.92	£468.63	£226.71
Take-home pay	£24,240.59	£25,660.30	£1,419.71

You keep £1,419.71 in cash, about 56 per cent of the rise, and £209.08 goes into your pension. Without the student loan you would keep £1,646.42, about 65 per cent.

Worked example: crossing into the higher rate

Now take a band 7 post in England moving from £49,387 to £51,932, a rise of £2,545. Gross pay crosses £50,270, so you might expect 40 per cent tax on part of it. The 9.8 per cent pension contribution (£5,089.34 at the higher salary) brings taxable pay back below the higher-rate threshold, however, so all the Income Tax is still at 20 per cent.

National Insurance does change: 8 per cent on the £883 up to £50,270 and 2 per cent on the remaining £1,662. Take-home pay rises from £35,206.30 to £36,938.89, so you keep £1,732.59, about 68 per cent. Anyone near the threshold can use this: because public sector pension contributions are taken before tax, your gross salary can sit a little over £50,270 without any higher-rate tax being due.

The pension band cliff

Most public sector schemes set your contribution rate from your whole pensionable pay, so moving into a higher tier raises the rate on every pound, new ones and old.

As a hypothetical, an NHS employee whose pay rises from £35,000 to £36,000 moves from the 8.3 per cent tier to 9.8 per cent. The pension contribution goes up by £623 on a £1,000 rise. After tax and National Insurance, take-home pay rises by only about £222. The extra contributions buy extra pension, so the person is better off overall, but the cash difference is small. Similar steps exist in the Teachers’ Pension Scheme, the LGPS and the Civil Service schemes.

Scotland

Scottish taxpayers face different marginal rates on earnings: 19 per cent starter, 20 per cent basic, 21 per cent intermediate from £29,527, 42 per cent higher from £43,663 and 45 per cent advanced from £75,001. Employee National Insurance stays at 8 per cent up to £50,270, so a Scottish taxpayer earning between £43,663 and £50,270 pays a combined 50 per cent on each extra pound before pension and student loan. Scottish S tax codes and rates has the full bands.

Other things a rise can affect

A rise can reach beyond the payslip. Adjusted net income over £60,000 starts the High Income Child Benefit Charge, which claws back 1 per cent of Child Benefit for every £200 above that. Means-tested support such as Universal Credit falls as earnings rise. Going over £100,000 can end eligibility for Tax-Free Childcare and funded childcare hours in England.

For a quick check on a specific rise, enter both salaries in the take-home pay calculator and compare the results. How pay progression works in the NHS explains when the next step is due.