Employment income is subjected to tax. If you earn an income from your employer or your business then you need to pay taxes and it will vary based on the total income you have for the year. Tax is a percentage of your income and there are different levels of percentages applied for different range of income. These are called tax brackets and the ranges of income and the percentage of tax applied varies based on country you are in. Note that the numbers I used in the following examples are arbitrary and not accurate but my purpose is to demonstrate how tax brackets work and I hope that I explain them clearly.
Normally, the first few thousands of dollars (or whatever currency you use in your country) of your income has no or very low tax percentage which means you will pay very little or no tax on them, say for example the first $15,000. The next level will be charged with a higher percentage, for example 20% for your income that is above $15,000 up to $35,000 which means that if your total income for the year is $35,000 then the amount between $15,000 to $35,000 (which is $20,000) will be taxed at 20%. That will equate to $20,000 X 20% = $4,000 of tax that you need to pay for that bracket.
This process is the same for the next brackets of income and so on but with a different range and tax percentage. For example, if income between $35,000 to $65,000 is subjected to a 25% tax then an income of $50,000 will be taxed at 20% between $15,000 to $35,000 and the amount between $35,000 and $50,000 will be taxed at 25%. Notice that for the last bracket the amount of your income is used to get the difference and not the maximum for that bracket. So if you only have $10 dollars of your income ending up in that bracket your tax will be just a percentage of the $10 and not the maximum amount for that bracket. Again, the numbers I used here are just examples and varies based on what country you are in but I hope that you get the idea of how tax brackets work.
There’s a misconception about tax brackets and there are many people who have no idea how it works. I heard people saying that if you work overtime you will just be paying it to tax so there’s no point in doing it. Your overtime pay will just be added to your income and will be charged at a higher tax bracket but only a portion of it will go to pay it since it will be just a percentage of your income. For example, if your yearly income is $100,000 and the tax bracket above that amount is 35% in your country then any pay you receive above it will be taxed at 35% which means you will still get 65% of it. Considering that overtime pay usually has a multiplier then you will still get more than your regular pay even if the tax bracket for the extra income is higher.
So if you’re situation allows for you to work overtime and you are willing especially if you are young and have no wife or kids then you can get extra income to put in your investment. This can help you reach your financial goals and hopefully you will no longer need to do it in the future once your investments are earning money for you.