The formula
How to calculate salary increase
A pay rise has two sizes: the number on the letter and what it is worth after prices have moved. The second is the one that determines whether you are actually better off.
The real increase is not simply the nominal figure minus inflation, though at low rates the two are close. Dividing rather than subtracting is correct, and the difference grows as both numbers rise.
What to enter:
- Previous salary
- New salary
- Inflation over the period (%)
Everything recalculates as you type, and the numbers in the address bar update with it, so a link to this page carries your figures with it.
Some of the fields above will accept figures that seem unusual for your own situation, and that is deliberate: the formula behind salary increase works the same way regardless of scale, so the calculator does not stop you testing a hypothetical scenario a long way from your actual numbers — often the fastest way to see which input the result is most sensitive to.
Why salary increase matters
The formula behind salary increase is standard and has not changed in decades; what changes is the situation it gets applied to. Two households can run the identical calculation and land on very different conclusions once their own numbers — income, rate, term, balance — are dropped in, which is why a generic textbook example is less useful than a calculator you can adjust to match your own circumstances.
It is also useful as a sense check before signing anything. A quote, an offer letter or a spreadsheet from someone else can contain an error, an optimistic assumption, or simply a different convention for rounding — running the same inputs through an independent calculator is a quick way to confirm a number before relying on it.
It is also worth being clear about what a single figure like this can and cannot settle on its own. It answers the specific question the formula was built to answer, and nothing more — a favourable salary increase result does not automatically mean a decision is a good one overall, since plenty of other factors that a formula cannot capture, from personal circumstances to how comfortable a commitment feels, usually matter just as much as the arithmetic. Use the number as one solid input among several rather than the whole of the decision.
Where the same calculation needs to be run for several different scenarios side by side — three loan offers, two savings plans — the fastest approach is usually to open the calculator in a second browser tab for each one, so that the results can be compared directly rather than overwriting each other in a single set of fields.
Worked example
A concrete run-through, using the values already in the fields:
- Previous salary: 42,000
- New salary: 45,500
- Inflation over the period: 3.2 %
That gives:
- Increase: 8.33 %
- Real increase after inflation: 4.97 %
- Extra per month, before tax: 291.67
These figures are only the calculator's own starting values, included so the working is visible rather than hidden inside the tool above. Replace them with your own numbers and the same arithmetic applies — nothing about the method changes, only the inputs feeding it.
Reading the result
An 8.33% rise against 3.2% inflation is a real gain of about 5%. A 2% rise against 5% inflation is a real cut of nearly 3%, however it is described in the letter.
Where this goes wrong. Comparing gross rises when tax bands do not move. A rise that crosses the £50,270 higher-rate threshold, or the £100,000 point where the personal allowance tapers, delivers far less net than the percentage suggests.
A useful check on any unfamiliar result is to compare it against a rough mental estimate first — round the inputs to convenient numbers and see whether the calculator's answer lands in roughly the same territory. A wildly different figure usually means one of the fields was entered in the wrong unit, most often a percentage typed as a whole number where a decimal was expected, or the reverse.
Anything above inflation is a real-terms improvement. UK private sector settlements have typically run between 2% and 6% in recent years, with promotions and job moves delivering considerably more.
Usually 60–68% of the gross increase for a basic-rate taxpayer after income tax, National Insurance and pension contributions. Higher-rate taxpayers keep less; anyone in a tapered allowance band keeps considerably less.
It returns increase. With 42,000 previous salary, 45,500 new salary and 3.2 % inflation over the period, that comes to 8.33 %. Change any field and the figure moves with it.
Whenever one of the underlying figures changes — a new interest rate, a different balance, an updated term — since the result only reflects what is currently in the fields. There is no need to keep a separate record of past results; the web address for a filled-in version already carries the figures used to produce it.
Not unless a tax rate or a fee is explicitly one of the inputs above. Where it is not, the figure shown is a gross calculation, and any tax due depends on your personal circumstances and current tax rules, which are worth checking separately.
The arithmetic itself is exact — the calculator applies the formula shown above precisely, with no rounding until the final figure is displayed. The uncertainty, where it exists, is entirely in the inputs: an estimated rate or an approximate balance carries that same approximation through to the result.