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Gross Pay: Definition, Calculation and Components
Understanding your gross pay is the first step to figuring out how much your employees actually take home. It is an essential aspect of financial planning and budgeting for your company.
Below is a comprehensive overview of how gross pay works so you can properly forecast and your employees can estimate the size of their paycheque.
Gross pay covers the total amount a company pays an employee, before any deductions are taken.
Net pay is the actual amount an employee takes home after mandatory and voluntary deductions are taken.
Salaried and hourly workers calculate gross pay differently.
What is Gross Pay?
An employee’s gross pay is the amount of money a company gives them before deductions. Generally, those deductions include National Insurance Contributions, pension contributions and more. Most organisations list the gross pay on their job listings to attract high-quality candidates.
Gross Pay vs. Net Pay
While gross pay is the total amount of money an employee receives from a company, net pay is the actual amount they take home. More specifically, it refers to the amount of money that lands in an employee's bank account after deductions.
It’s a more realistic reflection of a worker’s available income. As an employer, you are responsible for providing a detailed breakdown of every employee's gross pay, the amount taken away from it and what those deductions were used for.
What Gets Subtracted From Gross Pay?
Some deductions are universal, but others are specific to individual workers. Below is an overview of some of those expenses to help you better understand the reasoning behind them.
Tax contributions are the most common deductions from an employee's salary, with income tax being the most common. An individual's tax band determines how much income tax is paid. The amount is automatically withdrawn by HMRC.
National Insurance Contributions
NICs are a mandatory deduction from an employee's salary that helps fund several public programmes. For example, NICs support public healthcare, unemployment programmes and state pensions. The amount withheld from an employee's wage depends on how much they make and their national insurance category letter.
In addition, if the employer provides a private insurance option, its premiums are deducted from the employee’s gross pay.
Employers are typically required to enrol their workforce into an established pension scheme. As a result, a percentage of an employee's wages is deducted to pay for their pensions. Most policies also let workers voluntarily add to their savings over time by directly depositing more money or increasing the percentage taken away from their wages.
Membership in a trade union can be deducted from an employee’s gross pay. This method is called “check-off.” With check-off, you pay the employee’s union subscription directly to the trade union on their behalf.
Any adjustments to overpayment are made from an employee’s gross salary.
Gross Pay Calculator: How To Calculate Gross Salary
An employee can calculate their gross pay using their most recent salary statement. However, the calculation can vary depending on the payment method and available information.
Calculating Gross Pay as a Salaried Employee
To calculate annual gross pay as a salaried employee, you should:
Find the gross income per period.
Figure out the number of pay periods per year
Multiply the gross pay by the number of pay periods per year.
The equation is:
(Gross pay per pay period) x (annual number of pay periods) = Annual gross pay
Let’s say an employee earns £10,000 monthly in gross pay. That means there would be 12 pay periods per year or are paid £10,000 12 times yearly. The equation would look like 10,000 x 12 = £120,000, meaning the employee makes £120,000 per year before deductions.
Calculating Gross Salary as a Wage Employee
Hourly employees determine their wages slightly differently than salaried workers. The steps required are:
Determine the average number of hours worked weekly
Find how much an employee earns in one hour
Calculate weekly pay by multiplying work hours by the amount earned per hour
Multiply weekly pay by 48 to determine the annual gross income
In other terms, an hourly worker calculates annual gross earnings with this equation:
(average amount earned in one hour) x (average number of hours worked) = Average weekly pay
(Average weekly pay) x 48 = gross annual pay
So, say an employee worker earns £23 an hour and works around 40 hours a week. Multiplying these numbers results in £920 per week. Multiply that result by 48 and you get the final result of £44,160 earned per year before deductions.
Calculate Net Pay From Gross Pay
There’s also a way for employees to determine the amount of money they make before deductions from their net pay. The steps are:
Find annual net pay
List deductions and add them up
Add the total of deductions to the net pay
In layperson’s terms, the equations needed to calculate gross pay from net pay are:
(Monthly net pay) x 12 = Annual net pay
(Annual net pay) + (total of deductions) = (gross yearly pay)
For example, say an employee's annual take-home pay is around £27,000 and the total of their deductions totals to around £7,000. Add £7,000 to £27,000 to get a total gross annual pay of £34,000.
Frequently Asked Questions about Gross Pay
What Is Monthly Gross Pay?
Monthly gross pay is how much an employee makes per month before deductions are taken from their salary.
What Is the Difference Between Net Income and Gross Income?
Gross income is the amount of money an employee makes before deductions. Net income is their actual take-home pay.
How Do I Calculate Gross Pay?
A salaried employee calculates gross pay with this equation: (Gross pay per pay period) x (annual number of pay periods) = Annual gross pay
An hourly worker can calculate their gross pay with this equation: (average amount earned in one hour) x (average number of hours worked) = Average weekly pay. Then, take the average weekly pay and multiply it by 48 to get gross annual pay.
What Is an Example of Gross Income?
Gross income is often a round number that accommodates for required and voluntary deductions. For example, if net pay is around £27,824, then gross income is more likely to be closer to £35,000.
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We would like to inform you that the contents of our website (including any legal contributions) are for non-binding informational purposes only and does not in any way constitute legal advice. The content of this information cannot and is not intended to replace individual and binding legal advice from e.g. a lawyer that addresses your specific situation. In this respect, all information provided is without guarantee of correctness, completeness and up-to-dateness.
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