I Got a Pay Rise — What Should I Do With It? (UK Guide)

Getting a pay rise feels great. But without a deliberate plan, the extra money has a habit of disappearing into everyday spending within a few months — leaving you exactly where you started, just with higher expenses.

This guide gives you a step-by-step framework for making the most of extra income: protecting your future first, paying down costs, and then genuinely enjoying the rest.

Step 1: Calculate What You Actually Take Home

Before you plan anything, know how much the rise actually adds to your net pay after tax and National Insurance.

Basic Rate Taxpayer (income under £50,270)

For every extra £1,000 in gross salary:

• Income tax: £200
• National Insurance: £80 (at 8%)
• Net gain: approximately £720 per £1,000

Higher Rate Taxpayer (income over £50,270)

For every extra £1,000 in gross salary above the threshold:

• Income tax: £400
• National Insurance: £20 (at 2%)
• Net gain: approximately £580 per £1,000

The £100,000 Trap

If your new salary is between £100,000 and £125,140, you face the personal allowance taper — you lose £1 of your £12,570 personal allowance for every £2 earned above £100,000. This creates an effective marginal tax rate of 60% on income in this band.

If your rise takes you into this range, seriously consider directing the additional income into pension contributions (salary sacrifice) to pull your adjusted net income back below £100,000. The tax saving is significant.

Step 2: Increase Your Pension Contributions First

A pay rise is the easiest and psychologically painless way to boost pension saving. Because you’ve never had this money before, increasing pension contributions from a rise means you feel no reduction in your lifestyle.

How Much to Increase By

A useful starting point: direct at least 50% of the net rise into pension contributions. You can soften this as your financial position improves, but beginning with 50% builds strong habits.

Example: £3,000 gross rise → approximately £2,160 net (basic rate). Directing £1,080 net into pension (or £1,350 gross via salary sacrifice) is a meaningful increase with no lifestyle change required.

Why Salary Sacrifice Is the Most Efficient Method

If your employer offers salary sacrifice (most do), pension contributions are made from gross pay before tax and National Insurance are deducted:

• You save income tax and 8% NI (12% under some arrangements)
• Your employer saves 13.8% employers’ NI
• Some employers pass all or part of their NI saving to your pension as an additional contribution — ask yours

See our full salary sacrifice guide for how to set this up.

Step 3: Build or Top Up Your Emergency Fund

Before anything else in the “spending” category, confirm your emergency fund position. The standard guidance is 3–6 months of essential expenses in an easy-access savings account.

If you don’t have this, use a portion of each month’s net rise to build it. At the 2026 best easy-access rates (around 4.5–5%), a £10,000 emergency fund earns roughly £450–£500/year in interest too.

Emergency fund targets:

• Single, renting: 3 months expenses minimum
• Family, mortgage: 6 months expenses
• Self-employed: 6–12 months expenses

Step 4: Pay Down High-Interest Debt

Any debt costing more than your after-tax investment return should be paid down before investing. In practice, this means:

A sensible rule: any debt above 8% APR should be cleared before general investing (not pension — pension always wins due to employer match and tax relief).

Step 5: Fill Your ISA Allowance

The ISA annual allowance is £20,000 per person per tax year. Any income or gains within an ISA are tax-free for life.

For money above your pension contribution and emergency fund top-up, the ISA is the next priority:

• Cash ISA for money you may need within 5 years — current best rates around 4.5–5%
• Stocks & Shares ISA for money you don’t need for 5+ years — expected long-term real returns of 5–7%/year

2026/27 allowances:

• Stocks & Shares ISA: £20,000
• Cash ISA: £20,000 (combined across all ISAs, max £20,000 total)
• Lifetime ISA: £4,000 (counts within the £20,000 limit; available until age 50)

Step 6: Decide on Deliberate Lifestyle Improvement

After securing pension, emergency fund, and debt/ISA priorities, the remaining net pay rise is genuinely yours to spend. The key word is deliberate.

Rather than letting the money diffuse into extra coffees and subscriptions you stop noticing, choose where you spend it:

The Lifestyle Inflation Warning

The biggest risk with extra income is unconscious lifestyle inflation — when spending rises to absorb the rise without you making deliberate choices. Research suggests people spend roughly 80% of any income rise within 12 months, often without being able to account for where it went.

The antidote is simple: decide in advance how you’ll split the rise, automate the savings/pension increase, and the rest is genuinely free to spend.

A Simple Allocation Framework

Here’s a practical starting template for someone on a basic rate rise of approximately £200/month net:

Adjust proportions to your circumstances. The point is to act intentionally rather than letting inertia decide.

Practical Next Steps

1. Check your next payslip — confirm the gross and net rise
2. Log into your pension portal — increase contribution by at least the pension portion of your split
3. Set a standing order to your ISA or savings account for the day you’re paid
4. Review in 3 months — confirm the money is going where you intended

Related Guides

• How to Ask for a Pay Rise — getting the raise in the first place
• Salary Sacrifice Complete Guide — the most tax-efficient way to save more
• Should I Max Out ISA or Pension First? — full framework
• Is Salary Sacrifice Worth It? — worked examples
• Take-Home Pay Calculator — see your net pay at different salary levels