Tuesday, November 27, 2007
When is a pay increase not a pay increase?
This post is prompted by a similar question posed by Yamis (well, identical really) two posts down, and the comments that ensued. I thought I'd bump them up here 'cos I kind of like where it's going. In an intellectual sense, not a financial one, obviously.
It was all prompted by this observation from Yamis:
We then got to talking about how much pay increases of 4% and 6% meant for individuals in our chosen professions.
There's the kick in the gonads, folks: Pay increase - tax & ACC levy - inflation is often pretty marginal in terms of a net improvement in your financial situation. Pay increase - tax & ACC levy - inflation - cut to WFF entitlements - cut to Accommodation Supplement = sweet fuck all, and only a marginal improvement on no pay increase at all.
Or, as Yamis put it:
People seem to welcome pay increases with enthusiasm, but things like marginal tax rates aren't discussed often enough.
I then mapped out two scenarios, with some help from the IRD tax calculator. One for Joe Blogs (no allowances) on $50,000 getting a 4% increase. And another for Joe Blogs (no allowances) on $60,000 getting a 6% increases.
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If you are in the top tax bracket you lose 40% of any increase (39% tax + 1% ACC)
So basically a 6% increase becomes a 3.8% increase (i.e., someone on $60k would net about another $2,200 a year).
Although this percentage figure assumes you're keeping all of your existing pay - which you ain't.
Someone on $60k nets about $45k (excl. any rebates, supplements). So the extra $2,200 represents a 4.9% increase in net income.
Official inflation last year was 3.2%, so you're do slightly better than that. Again, this is assuming you have no rebates, WFF entitlements, or supplements to be cut, etc.
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If you are in the middle tax bracket you lose 34% of any increase (33% tax + 1% ACC)
So basically a 4% increase becomes a 2.7% increase (i.e., someone on $50k would net about another $1,350 a year).
Although this percentage figure assumes you're keeping all of your existing pay - which you ain't.
Someone on $50k nets about $38k (excl. any extra rebates, supplements). So the extra $1,350 represents a 3.5% increase in net income.
Official inflation last year was 3.2%, so you are idling in neutral. Any cuts to allowances or whatever and you Mr Blogs are in the red.
It was all prompted by this observation from Yamis:
PPTA members received a 750 dollar bonus as part of the agreement. However that was before tax of course. After tax it came out at about 480 dollars. I then called up the IRD to tell them about it and our family assistance payments are going to be cut by 17 dollars a week until the end of the tax year so in essence the 750 dollar bonus is going to wind up being about 180 dollars in my pocket. I dare not call Work and Income or else our Accommodation Supplement will get slashed and the bonus will end up costing us god damn money.
We then got to talking about how much pay increases of 4% and 6% meant for individuals in our chosen professions.
The thing is that when I get my 4% pay increase soon it will mean a couple of thousand extra, but once allowances are cut accordingly (and they will take a big hit) the actual amount that I am better off will be about 1%. And compare that to inflation ... and we will actually be worse off.
There's the kick in the gonads, folks: Pay increase - tax & ACC levy - inflation is often pretty marginal in terms of a net improvement in your financial situation. Pay increase - tax & ACC levy - inflation - cut to WFF entitlements - cut to Accommodation Supplement = sweet fuck all, and only a marginal improvement on no pay increase at all.
Or, as Yamis put it:
A 4% pay increase minus over 1% in tax equals about a 2.8% pay increase. So chances are a 4% pay increase will even mean that Joe Blogs with no allowances whatsoever is still going to be slightly worse off. And for Joe Family Assistance and Accommodation Supplement Blogs like myself you are actually clearly worse off.
People seem to welcome pay increases with enthusiasm, but things like marginal tax rates aren't discussed often enough.
I then mapped out two scenarios, with some help from the IRD tax calculator. One for Joe Blogs (no allowances) on $50,000 getting a 4% increase. And another for Joe Blogs (no allowances) on $60,000 getting a 6% increases.
=========================
If you are in the top tax bracket you lose 40% of any increase (39% tax + 1% ACC)
So basically a 6% increase becomes a 3.8% increase (i.e., someone on $60k would net about another $2,200 a year).
Although this percentage figure assumes you're keeping all of your existing pay - which you ain't.
Someone on $60k nets about $45k (excl. any rebates, supplements). So the extra $2,200 represents a 4.9% increase in net income.
Official inflation last year was 3.2%, so you're do slightly better than that. Again, this is assuming you have no rebates, WFF entitlements, or supplements to be cut, etc.
=========================
If you are in the middle tax bracket you lose 34% of any increase (33% tax + 1% ACC)
So basically a 4% increase becomes a 2.7% increase (i.e., someone on $50k would net about another $1,350 a year).
Although this percentage figure assumes you're keeping all of your existing pay - which you ain't.
Someone on $50k nets about $38k (excl. any extra rebates, supplements). So the extra $1,350 represents a 3.5% increase in net income.
Official inflation last year was 3.2%, so you are idling in neutral. Any cuts to allowances or whatever and you Mr Blogs are in the red.
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