Living expense calculations ignore that not all income is taxed

A video in a Facebook post has calculated the living expenses of an average person receiving the minimum wage to illustrate the difficulties of budgeting on a low income.

It goes without saying that many people on lower incomes are struggling to make ends meet, and rising inflation means this is getting harder. 

However, the calculations shown on the post are inaccurate, as they do not account for personal allowance or the National Insurance threshold when calculating how much tax a person would have to pay. 

The creator of the video, which originated on TikTok, has subsequently admitted that his calculation was wrong.

What the post claims

The post calculates figures for a person working full-time on the National Living Wage of £9.50 per hour. This is the minimum wage that can be paid to workers who are aged 23 or over, while workers under 23 years old can be paid less depending on their age.

It says a person earning this National Living Wage and working 40 hours per week can expect to earn £380 per week, or £1,520 over a four-week month.

It then claims that income tax charged at 20% and National Insurance contributions charged at 13.25% would mean this individual would be left with £1,014.60 each month after tax.

However, the post is wrong to assume that all of this income will be subject to income tax and National Insurance.

Not all income is subject to tax

While it is true that a person receiving the National Living Wage would pay these lowest rates of income tax and National Insurance, a significant chunk of their income would be exempt from taxation.

This is because all workers paid less than £100,000 receive a personal allowance of £12,570 which they do not have to pay tax on. They also do not have to pay National Insurance contributions on earnings below a certain threshold.

The personal allowance means that workers pay income tax on earnings above £12,570 per year. This means that a person earning £1,520 over a four week month, or £19,810 per year, would actually have to pay 20% Income Tax on £7,240 of their annual earnings, not all of it, meaning that they would pay £1,450 in income tax per year, or £111 per four-week period.

Similarly, the basic National Insurance rate for employees of 13.25% is currently only paid on income above £190 per week, meaning someone earning National Living Wage would pay £101 in National Insurance contributions per four-week period.

As a result, a person receiving the National Living Wage would take home £1,308 per four-week month after taxes, not £1,014.60 as the post calculates. This figure does not account for additional deductions that may be made by individual employees towards things like pension schemes, or additional income that may be received from benefits.

It’s also worth noting that from July 2022 the National Insurance threshold will be brought in line with the personal allowance of £12,570, meaning a person earning the National Living Wage would pay £73.14 in National Insurance contributions every four weeks, bringing their take-home pay over four weeks to £1,336.

However this higher amount of take home pay does not negate the post’s overall point that people on lower incomes often live on tight budgets with little disposable income.

The creator of the original TikTok video has posted a new video with revised calculations that appear to include the threshold and the personal allowance. This second video adds further costs, but also does not consider pensions or benefits.

Image courtesy of Colin Watts