Gross pay vs net pay: key differences and calculations

By Indeed Editorial Team

Published 15 June 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

When you earn money from working, there are inevitable deductions, such as taxes. This results in you having both gross and net pay. Identifying the differences between the two, including how to calculate each one, can allow you to effectively assess your personal finances and career trajectory. In this article, we explain the difference between gross pay vs net pay, state the common scenarios when you may encounter pay deductions and outline how to calculate both your gross and net pay.

What is the difference between gross pay vs net pay?

Below, you can determine the difference between gross pay vs net pay by looking at the definitions for each term:

What is gross pay?

Your gross pay refers to the full amount of your salary that you earn while working and is typically the figure used by employers when discussing earnings with employees. This figure represents the money that you've earned before any mandatory and voluntary deductions, such as income tax and national insurance contributions. The gross pay figure also includes any employee benefits you receive and extra allowances. This can include any overtime pay you've accrued, alongside other benefits like your medical insurance premiums and travel allowances.

Related: A guide to understanding base pay and how it changes

What is net pay?

In contrast, your net pay is the figure on your payslip after the removal of mandatory and voluntary deductions. This is the amount of money that you receive from your employer, which is usually deposited in your bank account. For many individuals, this figure indicates your available spending until you next receive your wages.

Related: What is net pay?

Common reasons for gross salary deductions

Consider below the common reasons for the deductions on your payslips:

Mandatory deductions

There are certain payroll deductions that all employers are legally required to carry out. The most common of these is income tax. As of May 2022, if you earn more than £12,570 per year, you're legally required to pay income tax on your earnings above this threshold. Due to this requirement, you have no control over this deduction. While the tax rates in Scotland differ slightly, the income tax rates in England, Northern Ireland and Wales include the following:

  • Between £0 and £12,570: This proportion of your earnings is your 'personal allowance', which is exempt from income tax.

  • Between £12,571 and £50,270: The Government taxes your earnings by 20%, if they're over your personal allowance and below £50,270 per year.

  • Between £50,271 and £150,000: The Government applies a 40% taxation rate for these earnings.

  • Income of £150,001 and above: If you earn more than £150,001 per year, the Government taxes these earnings at 45%.

National insurance contributions and any outstanding student loan repayments are also deductions that frequently feature on payslips. National insurance contributions are mandatory if you're over the age of 16 and you earn over £190 a week. These contributions allow you to access state benefits and the state pension. If you have an outstanding student loan, you're required to pay a fixed percentage of your earnings towards paying off your student debts after you pass a salary threshold. This threshold, and the amount you're required to pay, varies depending on where you live and when you attended university.

Voluntary deductions

Alongside mandatory deductions, you may receive less net pay due to voluntary deductions. These deductions are only taken with your expressed permission and there's no legal requirement to make these payments or contributions. Below are some of the common voluntary deductions you may see on your payslip:

Specific employer contributions

Some employers require their employees to make small contributions to the costs associated with them working for the organisation. A common example of this includes contributing towards work uniforms. It can sometimes be optional to pay this contribution but, for some organisations, it's a requirement. To accurately calculate your gross and net pay, make sure that you clarify this with your employer or HR department.

Pension contributions

Pension contributions refer to the sums of money taken from an individual's gross salary that's set aside to support them once they retire and are no longer working. The amount you contribute is typically flexible and you can increase or decrease these contributions, depending on your financial needs. Additionally, depending on your employer, many offer the benefit of matching or exceeding your monthly pension contributions. For example, if you contribute £200 towards your pension every month, your employer may offer to match these, which can result in you gaining £400 per month in pension contributions.

Charitable donations

Some employees may want to automatically make charitable donations once they receive their pay without paying tax on the donation. To do this, they can opt to pay a certain amount of money to their chosen charity for each pay period, which becomes a deduction on their payslip.

Employee benefits

Some employers offer their employees enticing benefits as part of their compensation package. For example, your employer may offer you reduced insurance premiums that cover some or all of the costs of your dental work. If you've opted for these employee benefits, your employer may require you to make some form of contribution, such as only paying the tax on the premiums.

Related: A guide on what net annual income is and how to calculate it

How to calculate your annual gross pay

Knowing how to calculate your annual gross pay is useful, as you can then use this information to calculate your annual net pay. Follow the steps below to calculate your annual gross pay:

1. Calculating gross income with a monthly salary

Calculating your annual gross income when you receive a monthly salary is simple and straightforward. To do this, access your latest payslip and identify the gross pay figure. This is the amount you've earned in a month without any deductions applied. As there are 12 months in a year, simply multiply this figure by 12 to determine your annual gross income.

2. Calculating gross income when paid hourly

Calculating your annual gross income is slightly different when you earn pay hourly. For these roles, you may receive a monthly, bi-weekly or weekly payslip. To complete this calculation, view your latest payslip and identify the number of hours you worked during the pay period. Then, divide that period's earnings by this figure to determine your hourly gross pay. You can then multiply this figure by the number of hours you work per week, followed by the number of weeks you work in a year to determine your annual gross income.

3. Calculating gross income with additional overtime

In some jobs where you earn a monthly salary, you can also earn overtime payments for the work you complete outside of your agreed hours. To accurately calculate your gross income, it's vital to take these extra payments into account.

If you earn overtime, you can calculate your annual gross income by first identifying the number of hours you've worked in a month and dividing this figure by your monthly earnings to determine your hourly earnings. You can then multiply this figure by the extra hours you worked in a month to identify your overtime pay during this period. Finally, add this figure to your regular monthly salary and multiply by 12 to determine your annual gross pay, which includes your overtime payments.

Related: What is gross monthly income? (And how to calculate yours)

How to calculate your annual net pay

Once you've ascertained your annual gross pay, you can then determine your annual net pay. Follow these steps to determine your annual net pay:

1. Consider your voluntary deductions

Once you've identified your annual gross pay, consider your voluntary deductions. Depending on your circumstances, you might have various voluntary deductions, such as medical and dental insurance premiums, pension contributions or a season ticket loan. Once you've identified your voluntary deductions, you can use these in combination with your mandatory deductions to calculate your net pay.

2. Identify your tax bracket and NIC

To gain an accurate figure for your net pay, it's necessary to determine your mandatory deductions. This usually refers to the amount you pay in income tax and national insurance contributions. Depending on your income, each person may pay a different rate for both. The amount you pay also varies depending on where you live. For instance, the tax rates in Scotland are different to the rates in England. When calculating your mandatory deductions, remember that you have a personal allowance, which is a proportion of your earnings that's exempt from these deductions.

Related: What is basic accounting (principles, jobs and education)

3. Calculate your net pay

To calculate your annual net pay, subtract both your voluntary and mandatory deductions for the year from your annual gross pay. The figure you're left with is your annual net pay. You can then use this figure to plan your spending habits for the upcoming year and budget accordingly.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

Related:

  • How do pensions work? (With types and FAQs about pensions)


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