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Am i being stupid, please educate me on link between CPI/RPI and the amount that is negotiated as a salary increase with your employer.
My understanding
If CPI/RPI is running at 8% and I'm lucky to get an 8% increase to my (PAYE) salary, this is added to my gross salary. But after tax, that 8% won't compensate for the increase in cost of living?
So should the equation be:
CPI/RPI rate + extra for salary deduction tax = True cost of living inflation match
So that your net salary remains in-line with the cost of living.
I'm not used to getting pay increments as i only moved to the private sector a few years ago, but this doesn't seem to get broken down like this from what I've seen? Have i missed something?
<p>It would compensate if tax thresholds increased enough. Roughly speaking, they generally do, but not necessarily every year. </p>
You're salary is gross, therefore any increase in salary is gross. Surely...
8% on your gross will also be (approximately) 8% on your net. Unless you move up a band, or cross a threshold, or increase pension payments. So in theory, 8% is 8%, even after you lose your ~32% in taxes and NI.
RPI and CPI are linked (sort of) to "buying power" which is all after tax.
The unfortunate thing is that both RPI and CPI aren't actually representative of the increase in the cost of living.
“Fiscal drag” means the OP is correct if thresholds are held fixed which is a stealth tax much beloved of struggling governments right now.
However there have been times when the threshold has increased substantially, effectively giving all workers a pay rise regardless of gross salary increase.
Negotiated increases are always on gross income. Everyone's tax code is different and untaxed deductions like pensions vary so it's impossible to do collective negotiations on net.
Your union rep should always push for RPI increase not CPI but will likely get knocked back on that one.
Tax thresholds are usually raised each year but the current government has frozen at a time of relatively high inflation so increasing the tax take from all but the very lowest paid, and moving quite a few of them into needing to pay tax.
Yes you should be angry about the government. Write to them, protest, even just point out to your mates how they are making most of poorer through stealth tax increases with the threshold freezes.
If your pay rise is rubbish and the collective agrees then push for more. All union brothers and sisters need to support each other for the common good.
OP, your assumptions are roughly correct.
You’ll lose tax on a gross pay rise so it’s worth anything from about 80% down to 30% of what’s awarded if you take it as net pay depending on tax and NI levels that apply to you.
That latter bit is partly why pay rises are based on gross pay: it is easy to calculate. Individual tax circumstances can be so different that to award a net rise of, say 10% (🤣🤣🤣 like that would happen for regular folks) would be impossibly difficult to calculate, budget for, and pay. And would be grossly unfair to some and crazy wild for others.
Obviously the other reason gross pay rises are discussed is that 5% of SFA sounds a lot better than 2% of net SFA.
You need to consider the effects of a pay rise based on your own circumstances.
Based on a few years’ experience, anything less than a move to a new company or dramatic change in role is likely to be along the lines of ‘ah, that’s nice but I’m still losing out to inflation’.
@thecaptain mentions ‘fiscal drag’. This is a cunning/lazy way that successive governments have kept tax thresholds (especially the 40% one) at the same level. Thereby bringing more people into the higher rate bracket.
One of the few ways to reduce the effect of losing out on the ‘my pay rise disappeared in tax’ problem is to just put the raise into your pension.
Thank you everyone. So i am over thinking the situation.
Effectively, pay should aspire to match inflation and the gross/net situation isn't a stealth loss.
Fiscal drag is a problem, but is a separate issue to annual pay negations.
<p>It would compensate if tax thresholds increased enough. Roughly speaking, they generally do, but not necessarily every year. </p>
Except for the next few years AKA more folk will be paying higher rate income tax.
https://www.theguardian.com/money/2023/may/16/one-in-five-workers-higher-rate-tax-by-2027-ifs
And because more people dumped extra into pension, they brought in the lifetime cap on that too. Death and taxes, unavoidable.
Our tax system is overly complex and has multiple 'gotcha!' Places where individuals end up paying ridiculous punitive tax rates.