Income Models

The goal of this section of the discussion is to try to construct some basic income models that might be broadly representative of people, who earn an average UK salary of £26,500, live in a partnership, have bought a house , then share the household cost of living plus contribute towards a pension. Whether this model is ‘typical’ might be debated as the average family income in the UK is only £40,000, but let us proceed on the following assumptions:

Item Person-1 Person-2 Combined
Average Salary = £26,500 £26,500 £53,000
Tax Allowance = £10,000 £10,000 £20,000
Taxable Income = £16,500 £16,500 £33,000
Tax Rate = 20% 20% 20%
NI Allowance = £7,956 £7,956 £15,912
NI Income = £18,544 £18,544 £37,088
NI Rate = 12% 12% 12%

The two people in this partnership model earns the same, where the table above outlines both the tax and class-1 national insurance (NI) allowances and subsequent rates deducted by the government. The following table then quantifies the amounts paid in tax and NI plus pension contributions, mortgage and household costs to be subsequently discussed.

Item Person-1 Person-2 Combined %
Gross Income £26,500 £26,500 £53,000 100.0%
Tax £3,300 £3,300 £6,600 12.5%
NI £2,225 £2,225 £4,451 8.4%
Net Income £20,975 £20,975 £41,949 79.1%
Minimal NEST Pension £1,060 £1,060 £2,120 4.0%
£200,000 Mortgage £5,691 £5,691 £11,381 21.5%
Disposable Income £14,224 £14,224 £28,448 53.7%
Household Costs £11,503 £11,503 £23,005 43.4%
Balance £2,722 £2,722 £5,443 10.3%

In the table above, we see the gross income, based on the average salary in the UK, has been reduced to a ‘net income’ of 79.1%, after income tax and national insurance. However, earlier it was suggested that people, on average, may be paying 50% of their income in tax. Of course, it needs to be remembered that most ‘household costs’ will incur 20% VAT, while items such as petrol and alcohol can be subject to an additional tax,  up to 60%, with house buyers also paying an additional tax in the form of stamp duty without even taking into account the council poll tax or car tax.  As such, the entire UK tax system might be described as a system of incremental ‘stealth’ taxation by which few people actually realise the total amount of taxation being levy on them. However, the definition of ‘Disposable Income’ in the table above also reflects that fact that most people have to pay off a ‘mortgage’ and contribute to a ‘pension’ for most of their working lives.

Note: The figures given for the NEST pension and £200,000 mortgage will be explained and revised later in the discussion, as these figures represent a minimal pension and probably overly optimistic mortgage rate for the future.

As such, the reduction of the disposable income to 53.7% of the gross income represents the money left to pay for the ‘cost of living’ in the form of the ‘household costs’. By way of clarification, and some justification, the household costs shown above are based on the following breakdown of typical costs, which are shared equally within the partnership. As both partners are assumed to be in full-time employment, it is also assumed that both will require the expense of running their own car.

2-Person Household Cost Breakdown
Category Item Cost %
Utilities: Rates £1,000 4.3%
Electricity £700 3.0%
Water £400 1.7%
Gas £700 3.0%
TV £145 0.6%
Phones £350 1.5%
Broadband £200 0.9%
House
Maintenance:
House DIY £500 2.2%
Garden £500 2.2%
Appliances £500 2.2%
Furniture £500 2.2%
Car-1: Depreciation £1,000 4.3%
Tax £155 0.7%
Fuel £2,000 8.7%
Servicing £500 2.2%
Insurance £500 2.2%
Car-2: Depreciation £1,000 4.3%
Tax £155 0.7%
Fuel £2,000 8.7%
Servicing £500 2.2%
Insurance £500 2.2%
General: Clothes £1,000 4.3%
Groceries £4,000 17.4%
Holidays £2,000 8.7%
Entertainment £1,000 4.3%
Gifts £400 1.7%
House £500 2.2%
Insurance £300 1.3%
£23,005 100.0%

However, at this stage, no consideration has been given to the repayment of any student loans or the cost of purchasing household furniture and appliances when initially setting up home, which often incurs additional loans via credit cards.