What Happens to Your Tax When a Raise Lands Mid Year

Getting a raise is straightforward. Reading the payslip afterwards is less so, because payroll systems have to answer a question that seems simple and is not: how much tax should be withheld this month, given that annual tax is calculated on annual income and the year is only partly finished?

Two answers are in use and they behave very differently.

Cumulative and non-cumulative payroll

• Cumulative. Each payslip recalculates tax on total income for the year to date, compares it with tax already deducted, and takes the difference. The United Kingdom, Ireland and several others work this way.
• Non-cumulative. Each payslip is treated in isolation, usually by annualising the month and dividing by twelve. Germany, the Netherlands and most of continental Europe use variants of this, with a reconciliation at year end.

The distinction is explained in full in cumulative and non-cumulative payroll. What matters here is what each does when the salary changes.

The cumulative case

Take a UK employee on 45,000 pounds who receives a raise to 60,000 in July, exactly halfway through the tax year. Their annual income for the year is not 60,000 and not 45,000, but around 52,500.

From April to June, payroll deducted tax as though the annual salary were 45,000, entirely within the basic rate band. From July it must deduct as though the annual salary were 60,000, which crosses into the higher rate band. But the cumulative calculation works on the actual year to date figure, so the effective annual position it is aiming at is 52,500, and the tax is spread evenly across the remaining months.

The result is smooth. There is no shock month, no correction, and by March the total deducted equals the total owed. This is the main advantage of cumulative systems and it is why UK employees rarely file a tax return.

The non-cumulative case

The same raise in Germany produces a different pattern. Each month's Lohnsteuer is calculated by projecting that month across the full year. In June, payroll projects 45,000 and deducts accordingly. In July it projects 60,000 and deducts at the rate appropriate to a 60,000 salary, even though your actual annual income will be around 52,500.

You are therefore over-deducted from July onwards. Nothing is wrong, and the excess comes back through the annual return, which is one of the reasons German refunds are so common. It is also why a raise can feel less valuable in the first months than it turns out to be.

The French case is the opposite problem

France sets your withholding rate from your last declared income and applies it until a new rate is issued. A raise therefore produces under-deduction, not over-deduction, because the old rate is applied to the higher salary until the tax office updates it.

You can request an update yourself through the online portal, and for a large raise it is sensible to do so, because the shortfall is collected later in a lump. The mechanics are in withholding at source in France.

What to check after a raise

1. Compare the increase in net pay with the increase in gross pay, and check it against your marginal rate rather than your average rate. A raise is taxed at the top, not at the average. See marginal rate vs effective rate.
2. Check whether the new salary crosses a threshold that does something other than change the tax rate. Allowance tapers, benefit withdrawals and contribution ceilings all create points where the marginal rate jumps.
3. Check whether pension contributions are a percentage of salary. If so, they rise automatically and part of the raise disappears into the pension, which is usually good but is not cash.
4. In non-cumulative countries, expect to be over-deducted for the rest of the year and plan on the refund arriving several months after year end.

The most common complaint

People frequently report that a raise left them with almost nothing extra. Where this is genuinely true rather than a withholding artefact, the cause is almost always a threshold effect rather than the ordinary rate schedule. The UK personal allowance taper above 100,000 pounds is the sharpest example on this site, and it is covered in earning past 100,000.