Author Topic: A pay raise- losing proposition?  (Read 1786 times)

Sunnysof

  • 5 O'Clock Shadow
  • *
  • Posts: 64
A pay raise- losing proposition?
« on: February 21, 2018, 12:21:22 AM »
Some colleagues at work have negotiated a blanket increase in wage for everyone of 0.5% per year for two years. This would just push some of us into a higher taxation bracket and actually reduce our take home pay by 3.5%. There would be increase to pension contributions a little. So my thinking is to take a voluntary unpaid leave to reduce our income back to the lower taxation bracket. Does this make any sense?
« Last Edit: February 21, 2018, 09:01:33 AM by Sunnysof »

marty998

  • Walrus Stache
  • *******
  • Posts: 6481
  • Location: Sydney, Oz
Re: A pay raise- losing proposition?
« Reply #1 on: February 21, 2018, 01:11:13 AM »
No, it doesn't.

Tax is applied as marginal rate on additional income, not to all income.

Take the extra money.

Villanelle

  • Magnum Stache
  • ******
  • Posts: 2950
Re: A pay raise- losing proposition?
« Reply #2 on: February 21, 2018, 02:31:17 AM »
Do some light research on how taxes work.  But basically, when you go up a tax bracket, only the income over that threshold is at the higher rate.

So, (brackets made up for easy and clear math), let's say this was the tax rate set up.

0-$10,000=0%
10,001-20,000=5%
20001=30,000=10%
30001=40,000=20%

Someone making $9000 pays $0 (0% of 9k)
Someone making $20,000 does not pay $1000, which would be 5% of that 20k.  The first 10k is at the 0% rate, and only everything over that is at the 5% rate, so they would pay $500.  (0% of 10k + 5% of the second 10k--the salary from $10000 to $20000).  Someone making $30k would pay $1500 (0% of 10k, 5% of the second 10k, and 10% of the third $10k).

And so on.

This means that making more money can never cause you to take home less, because only the money over the next bracket leve is at the higher rate.  So in my example, if the raise bumped you from $30k to 30,500,  $500 of your money would be in the higher 10% tax bracket.  But you'd still only pay $1500 on that first $30,000, and then that new $500 would be taxed at 20% ($100).   So before the raise you took home $28,500 ($30,000 minus $1500) and now you take home $28,900 ($30,500 minus $1600).  So the raise still causes you to come out ahead.

Hopefully that helps. 

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: A pay raise- losing proposition?
« Reply #3 on: February 21, 2018, 05:39:01 AM »
Tax brackets donít let you lose money on a raise, but 0.5% a year is a pretty crappy annual raise to be locked in to in this labor market.

Bird In Hand

  • Pencil Stache
  • ****
  • Posts: 583
Re: A pay raise- losing proposition?
« Reply #4 on: February 21, 2018, 07:23:29 AM »
Tax brackets donít let you lose money on a raise, but 0.5% a year is a pretty crappy annual raise to be locked in to in this labor market.

OP doesn't indicate which country s/he lives in.  If it's the US, I agree that 0.5% is lousy since the OPs standard of living may actually be going down due to inflation.

On the bright side, at least OP has a pension.  Hopefully the pension improvements OP alluded to at least somewhat make up for this paltry 0.5% raise.  :(

Sunnysof

  • 5 O'Clock Shadow
  • *
  • Posts: 64
Re: A pay raise- losing proposition?
« Reply #5 on: February 21, 2018, 08:59:12 AM »
Thanks. Should have said, I'm in Canada. Don't know if income tax works the same here as in US. The small increase is because, well, I'm in Canada. I could put more into RRSPs as many try to do here to reduce taxable income but frankly don't have that much excess to put in. Anyone more familiar with Canadian taxes?

ooeei

  • Handlebar Stache
  • *****
  • Posts: 1143
Re: A pay raise- losing proposition?
« Reply #6 on: February 21, 2018, 09:12:31 AM »
Thanks. Should have said, I'm in Canada. Don't know if income tax works the same here as in US. The small increase is because, well, I'm in Canada. I could put more into RRSPs as many try to do here to reduce taxable income but frankly don't have that much excess to put in. Anyone more familiar with Canadian taxes?

So you want to take unpaid leave to reduce your income, but aren't able to afford putting more in your RRSP to reduce your income?  That makes no sense. Just put your whole raise in your RRSP and as far as your taxes/spending money are concerned you didn't get a raise.

Sunnysof

  • 5 O'Clock Shadow
  • *
  • Posts: 64
Re: A pay raise- losing proposition?
« Reply #7 on: February 21, 2018, 09:27:57 AM »
Ok, I was misunderstanding how income was taxed. But then I don't understand  why my paycheque has been lower since the raise came in. Is this because of CPP and EI increases that will max out in a little while?

PoutineLover

  • Handlebar Stache
  • *****
  • Posts: 1197
Re: A pay raise- losing proposition?
« Reply #8 on: February 21, 2018, 04:14:26 PM »
Ok, I was misunderstanding how income was taxed. But then I don't understand  why my paycheque has been lower since the raise came in. Is this because of CPP and EI increases that will max out in a little while?
Doesn't your paycheck have a detailed breakdown of deductions? This info should be pretty clearly indicated

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: A pay raise- losing proposition?
« Reply #9 on: February 21, 2018, 08:01:47 PM »
Employers do miscalculate sometimes; if your take home went down you could ask them to walk you through it.