It’s the age-old question, what is gross pay? And how does it differ from the net pay you take home at the end of the month. It can be frustrating looking at your payslip and seeing two different totals, and at the end of the day you come home with the smaller number. But there is a good reason as to why we have both.
Let’s break down gross pay vs net pay, why we need them both, and how they’re calculated.
What is Gross Pay?
To put it simply, gross pay is total salary divided by the number of pay periods. So, if you know how much the offered salary is, and how often your pay periods are, then it’s really easy to calculate what the gross pay is. Example: if you make £30,000 a year and get paid monthly, your gross pay would be £2500 per month.
And that’s why it can be complicated, especially when starting out – because a £30,000 a year salary doesn’t mean you’ll take home £30,000. But that’s where net pay comes into play.
What is Net Pay?
Net pay is the amount of money you get to take home each month after all deductions are made. Each country will have their own list of mandatory deductions, but there are a few standard ones that most countries will follow.
To summarise, gross pay vs net pay: what is the difference?
Gross pay is your salary before any deductions. Net pay is your salary after all mandatory deductions, and this is what you get to take home.
What are deductions from Gross Pay?
- Tax: This is deductible in most countries. The percentage you pay in tax is set out by the local government, and in many cases will vary depending on how much your salary is. In some places like the US, you’ll pay two different types of taxes,: your federal tax and your state tax, so it’s important to check you’re paying the full amount owed.
- Social Security / National Insurance: One of the big things that comes out of salaries is your social security contributions, which often go towards things like local healthcare or your local state benefits.
- Insurance: If you have private health insurance ran by your employer, the cost of this is deductible from your salary (depending on what the agreement is).
- Pensions: This is the money which is put aside for your retirement. In most countries this is a percentage which is deducted and put towards your state pension. However, in countries such as the UK it’ll be a workplace pension where a percentage of your salary is added, and your employer will also contribute a percentage too.
- Salary sacrifices: This is anything else that might need to be taken from your salary. For some people, this could be court ordered payments, additional payments towards your pension, or the cost of hiring something from your employer.
How do I calculate net pay?
- Start with your gross salary
- Subtract your ‘pre-tax’ deductions
- Subtract the tax and social security amounts
- Subtract any other salary sacrifices you have
- You’ll have your total net pay
It can be a hard one to figure out on your own, luckily there’s many calculators online which can calculate your estimated net pay for you – and your payroll team will be able to help.
Why do I need to know both?
It’s obviously frustrating to see what you could have had on your payslip. In some countries it is a legal requirement to provide employees with a breakdown of their salary. However, one of the major reasons we need both on our payslip is for our payroll teams.
As a payroller you need to see a full breakdown of gross pay vs net pay, so you know what is being paid to where. You might think it’s as easy as this person makes X amount a year, so that’s what we’ll pay them, unfortunately it’s not. There’s lots of calculations involved in working out what someone needs to be paid each month.
But as an employee it’s also good for you to see exactly what you’re paying in tax, social security and pensions so you can understand where your money is going – and keep track of any changes on your payslip which may seem out of the ordinary.
What does this mean globally?
Just like most things in global business, each country is going to have their own deductions, tax rates and processes for calculating net pay.
As a payroller, knowing the difference between gross and net pay and how to calculate it on employees’ payslips is vital. It can get a bit complicated when you’re running payroll in multiple different countries, but that’s where Just Payroll Services can come in to help with our international payroll services.
We are experts in paying people around the globe (and of course experts in gross pay vs net pay), so if you’re struggling with all the different countries processes then reach out today!
