Just promoted? Know this before spending the extra cash

There’s no better way to know your hard work has paid off than getting a promotion. And for most of us, even more valuable than a new shiny title and the recognition is the increase you’ll see on your next pay slip.

Especially early on in your career, just a little extra cash can make a big difference in your lifestyle. However, without considering what we plan to do with the extra money, it’s easy for it to slip away on expenses that don’t really make a significant change in our day-to-day life or satisfaction. That’s not to say you shouldn’t enjoy your extra cash: you should! But a little careful planning before you start spending to incorporate both your joy purchases and your financial goals could make the extra money from your raise a true financial change, rather than just a few extra splurges.

Here’s a few simple steps to put you on the right path.

Understand what it means for tax

There's a chance a pay rise could push you from being a basic rate taxpayer (with income up to £50,270) to a higher rate taxpayer. Or, you could be moving from higher to additional rate, where your personal allowance begins to shrink after £100,000 and you pay a 45% income tax on any earnings over £125,140.

Unfortunately, these tax rises aren’t limited to income tax. Your personal savings allowance, which can be used to cover interest on your savings, drops from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers, and down to zero for additional rate taxpayers. It also increases your rate of dividend tax, and capital gains tax.

The good news is your tax wrappers are still there to help. You can likely pay more into your pension, and you can also take advantage of ISAs to protect your savings and investments from income tax, dividend tax and capital gains tax.

Give your pension a boost

One of the most effective ways to super-charge your pension is to dedicate a chunk of your raise to increasing contributions. You haven’t had a chance to get used to this extra money in your pocket, so you won’t miss it, and there’s no need to make any lifestyle sacrifices. If you pay into your pension based on a percentage of your salary, a pay rise will automatically increase your pension contributions. But you can boost your pot further by increasing the portion of your salary that goes to your pension.

Avoid lifestyle creep

It can be far too easy to absorb extra income into your everyday spending, without having much to show for it. People will often trade up to slightly nicer versions of things they already spend money on, like holidays or switching your grocery purchases from shop brand to branded products. This eats into your pay rise without you noticing, and sometimes without even making a big difference in your lifestyle and happiness. It’s far better to make a conscious decision about the best way to use the additional income to build your financial resilience across the board.

Get a grasp of your new finances

A raise can be a great time to take stock of your financial position. In addition to increasing your pension payments, do you have expensive short-term debts you can pay down each month? Do you have enough emergency savings? Can you start regular investing? You don’t need to do all of these things at once, but just changing one of these things can make a big difference in feeling financially secure.

Automate doing the right thing

Whatever steps you decide to take to improve your finances, try to set them up to happen automatically without you having to do the right thing every month. For example, you can set up direct debits to repay expensive short-term debts.

When it comes to saving and investing, you can use regular payments to pay into a savings account every month and set up an instruction to invest each month. Some providers, such as AJ Bell, allow you to set up regular investments with as little as £25 a month with no dealing charges to pay on top. It’s an effective way to reduce the time it takes to invest and means you don’t have to worry about trying to time the market, enabling you to build towards all your financial goals without a huge amount of effort.