Lessons · Accounting · why more income never leaves you with less
Why more income never leaves you with less
Crossing into a higher band raises the rate only on the income above the threshold. The income below it is taxed exactly as before. So extra earnings are always worth something after tax, and no raise under a banded system can reduce take-home pay.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
This is probably the most widely held false belief about money there is, and it is not harmless. People decline overtime, refuse promotions and turn down work because they believe a threshold will cost them. The belief survives arguments because it feels like it explains something, and it does not survive the arithmetic, which is why this road computes both sides rather than asserting the conclusion.
How to think about it
Compute the tax at the old income and at the new one. Subtract. Compare the extra tax with the extra income. The extra tax is always smaller, because it applies only to the part in the higher band.
Worked example
Tax at the old incomeComputed band by band.
Tax at the new incomeThe same bands, one of them reaching further.
The extra tax applies only to the slice above the thresholdEverything below is taxed as it was.
Extra income less extra tax is always positiveWhich is the whole answer.
Your turn
Name what happens to the income below the threshold when you cross it.
Income below the threshold is taxed exactly as
Solve one, graded on the server
The trap
Believing the exception you heard about. Specific benefits and allowances can be withdrawn at particular income levels and that is a real effect with its own name, but it is not the bands doing it, and it does not make the general belief true.