Come January, I’m expecting a huge raise. Most workers get a huge raise at the start of a new year, but they don’t realize it. In the last days of the year, you are taxed at your top marginal rate, but in January the slate is clean and your income is untaxed for a while.
You won’t see any of this on your pay stub, though. Payroll taxes are designed to smooth out the effect I’m talking about by predicting your final taxable income and taking equal amounts of tax off each pay. But your real taxes are based on your actual income using progressive percentages.
For a person earning $100,000 per year in Ontario, after-tax pay at the end of this year is $28.92 per hour, but will rise to $51.11 per hour starting in January (based on 37.5 hours per week and 365.25 days per year). Of course, it will then drop off over the course of 2012.
For most of us who collect a regular income for the whole year, none of this makes much difference, but for those who work irregularly of for irregular pay rates, this effect can be important.
For example, if you’re planning to quit your job to live off your savings for a few years and see the world, it’s better to wait until March than to quit in December. This way you’ll get paid during the high-income period at the start of the year.
If you’re planning to do something that will cause a big change in your income, it pays to understand our progressive tax system and how it affects your final tax bill.