What a 5 Percent Raise Means for Your Take-Home Pay

A raise represents an increase in compensation an employee receives for their work. When this increase is percentage-based, such as a 5 percent raise, it signifies a direct proportional growth relative to current gross pay. Understanding the implications of such a raise involves looking beyond the initial percentage to consider how it affects various aspects of personal finance.

Calculating the Gross Increase

Determining the direct numerical increase from a 5 percent raise begins with understanding your current gross pay. For an annual salary, the calculation involves multiplying the current salary by 0.05. For instance, an individual earning an annual salary of $60,000 would see a gross increase of $3,000 ($60,000 x 0.05), bringing their new annual salary to $63,000.

For hourly employees, the process is similar but applied to the hourly rate. If an employee earns $20 per hour, a 5 percent raise adds $1.00 to their hourly wage ($20 x 0.05), resulting in a new hourly rate of $21. This new hourly rate then applies to all hours worked. Over a standard 40-hour work week, this means an additional $40 in gross pay ($1.00 x 40 hours), leading to a higher weekly gross income.

Understanding Net Pay Impact

While a 5 percent raise directly increases gross pay, the impact on take-home pay, or net pay, is less straightforward due to various deductions. Federal income tax is progressive, meaning different portions of income are taxed at increasing rates, ranging from 10 percent to 37 percent for 2025. An increased gross salary can push more of an individual’s income into higher tax brackets, though the entire salary is not taxed at the highest marginal rate.

Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, are withheld from wages. Employees contribute 6.2 percent to Social Security on earnings up to $176,100 and 1.45 percent to Medicare on all wages. An additional 0.9 percent Medicare tax applies to wages exceeding $200,000 for single filers. State income taxes, which vary significantly by location, and pre-tax deductions for benefits like 401(k) contributions or health insurance premiums also reduce the net amount received. The actual percentage increase in net pay will typically be less than the 5 percent gross raise.

Considering the Real Value

The real value of a 5 percent raise is influenced by inflation. Inflation erodes the value of money over time. Recent annual inflation rates have been around 2.7 percent to 3.1 percent as of July 2025. For a raise to genuinely increase purchasing power, it needs to exceed the rate of inflation.

A 5 percent raise also impacts salary-dependent benefits. Employer-matched 401(k) contributions are often based on a percentage of an employee’s salary. A higher salary means a larger base for these calculations, increasing the employer’s contribution to a retirement account. Similarly, employer-provided life insurance coverage is a multiple of an employee’s annual salary, so a raise could lead to increased death benefit coverage without additional personal cost.