Why would you ever turn down a raise in salary?

Question

Related to a comment on this question: http://www.basicallymoney.com/questions/1256/is-it-true-that-income-tax-was-created-to-finance-troops-for-world-war-i

Does it ever make financial sense to turn down a raise at your job? It was mentioned for tax reasons it did no good, but would not getting a raise have other intangible benefits besides a larger paycheck?

I got a $2/hr raise once that amounted to $50 extra per month because I just barely bumped into the next bracket, but the new gross income was enough to qualify for a re-finance of my house.

When is it bad to take a raise at work?

Answer 1

I don't know of a situation where rejecting a raise would make sense. Often, one can be in a phaseout of some benefit, so that even though you're in a certain tax bracket, the impact of the next $100 is greater than the bracket rate alone. Taxation of social security benefits is one such anomaly. It can be high, but never over 100%.

Answer 2

I probably wouldn't turn down a raise, but there are some circumstances in which you might hesitate. Having a disproportionately high salary for your type of role or the value you are providing to the company makes you an attractive layoff target in an economic downturn. I've heard anecdotally of lots of corporate lawyers getting laid off because they were getting raises every year, and ended up with such ridiculous salaries that when the economy went south, the company basically asked "why are we paying these people so much?" Same thing happens in lots of places - Circuit City lays off the experienced, highly-paid salespeople and brings in cheap-o high school students (that didn't work out well for them, but they did it anyway).

Still, even knowing that, I'd accept the pay raise. You're making more money the whole time you're employed, and prior salary is the biggest predictor of the salary you can negotiate at a new position.

Answer 3

My answer has nothing to do with tax brackets or mathematics (I'm taking advantage of the leeway your question allowed), but rather it has to do with career goals and promotion.

Large companies often have large "Policies & Procedures" booklets to go with them. One policy that sometimes exists which would make it a bad idea to accept a raise is:

Employee cannot be given more than one salary increase in a 12-month period

This means that if you accept a standard-of-living or merit increase of say, 2% or 3% in April, and then you apply for a job that would otherwise warrant a pay grade increase, you may be forced to wait until the following year to get bumped to the proper pay grade.

Of course, this totally depends on the company, but it would be advisable to check your company's H.R. policy on that, if you're considering a move (even a lateral one) in the future.

Answer 4

I would turn down a 20% raise in salary without thinking, if they would offer that I can have a 4 day work week. I even take a 10% cut for this!

Answer 5

If you have children in an ivy league university institution, then your annual salary is reported via financial aid forms. The small raise could be the difference between full tuition covered and only half tuition covered.

Answer 6

I had a colleague turn down a raise once because he believed that female colleagues were already being paid well below his salary and it was unfair to further increase this gap.

For very public figures raises are often declined as a form of leadership: showing that management is willing to forgo bonuses and salary increases as a form of solidarity with the employee population. Some leaders forgo a salary altogether (or take a $1/year salary).

Answer 7

Here in Germany there is a special case. I am studying (and working a litte on the side) and still receiving child benefits from the state which is like 190€/m. Because i am getting this i dont have to pay tuition which is 1k/y.

If my side income would get over the boundary (which is like 9k/y) i would loose those benefits (~3.3k) and would have to pay insurance myself (i dont know how much that would be 50-100/m i guess)

So getting a raise vom 8k to 10k sounds nice as it is a 25% raise, but it actually means getting less.

Answer 8

In the UK, recent changes to pension taxation mean that from April 2011, people earning between £150,000 and £180,000 total and making large pension contributions (>£50,000 or so) will pay a marginal tax rate on additional salary of >100%.

This is because pension contributions normally attract tax relief at the highest marginal rate - i.e. 40% if the gross salary is above about £40,000, and 50% for salaries above £150,000. But after April 2011, the rate of relief will be tapered down for gross salaries above £150,000, reaching 20% for a gross salary of £180,000.

So for example if you earn £175,000 and make a contribution of £50,000, then an additional £1,000 in salary will incur £500 of direct tax, and also lead to a 1% reduction in tax relief (from 25% to 24%), costing another £500. Once you factor in National Insurance of another 1% or so, the net effect of the pay rise is negative.

Answer 9

I once turned down a raise because I didn't agree with the employee review that supposedly substantiated the raise. I felt the review to be superficial and incomplete. Then I refused to sign it, or take the accompanying raise, due to that fact.

Answer 10

The only valid reason from a financial point of view is if the raise is a promotion or comes with conditions that are unacceptable to you. You may not want added supervisory responsibilties, for example.

You need to use discretion when refusing advancement though, at places where I have worked, declining a raise or promotion is seen as a career killer for some circumstances.

Answer 11

At least with US tax law where you only pay taxes at the higher rate for the income above the minimum for that tax bracket, you will always wind up ahead taking the raise if you are simply concerned with after tax (FICA) income.

For example, assume you were making $8,350 (the top end of the 10% bracket in the US), and got a $100 raise, you would be taxed roughly as follows:

After Tax Income Before Raise: $8,350 x (100% - 10%)
After Tax Income After Raise: $8,350 x (100%-10%) + $100 x (100%-15%)

You can easily see that the second number is always higher than the first as long as the raise is a positive amount (obviously).

Answer 12

In the UK, the government has recently announced that Child Benefit will no longer be paid to those who earn over £44k. This means that if you currently earn £43,999, and your employer offers you a raise of £10 per annum to £44,009, then you could be over £1k worse off as a result.

Answer 13

Sometimes it's not entirely about take-home pay. A pay raise can affect other things like:

• Company contribution to one's pension
• Health and Dental Benefits
• Share purchase plans
• Group insurance rates
• Vacation qualifcation

These things need to be considered since they also affect quality of life.

Answer 14

One "economic reason" to turn down a raise is if your company gives bonuses based on performance reviews. When you get a raise in salary, your boss usually expects a better performance from you. That being said, if you get the raise, and your performance review is worse, you might get a smaller annual income.

Answer 15

I recently was offered $1/hr raise. I turned it down because 1.)I had been looking for other jobs and the extra $150 per month wasn't enough money to keep me from exploring other options so it would look bad to take a raise and leave a month later. You never want to burn bridges. 2.) Raises aren't given out everyday. The business I work for is having financial troubles and the $1/hr was probably the best they could do at the time. If business picks up and they can afford to give me more money they won't do it because the record will show that I just got a raise.

One good extra is that your boss will be flabergasted that you just turned down a raise and you may gain a lot of respect from your superiors. Don't confuse strategically turning down a raise and letting others sway your opinion because they don't wanna cough up the cash.

Answer 16

There are some student loan repayment programs and the like where, if a raise would bump you past a certain threshold, you become ineligible and are suddenly left holding the whole bag, or alternately the payoff for having your loans forgiven/repaid drops considerably.

It can make financial sense to avoid crossing those thresholds.

Answer 17

This would never apply for tax "brackets". It's not as though making an extra dollar will put you into an entire separate bracket, the IRS isn't that bad. They bump up the "brackets" every $50, so you will never turn down a raise because it would cause you to lose income. However if your raise would preclude you from contributing to your IRA because it pushes you over $110,000 then yes, you could turn it down or explain to your boss that it would need to be just a little bit higher to cover your IRA contribution loss.