What Is Gross Pay? Definition, Examples & Calculation
Every business operates a little bit differently. Some have salaried employees, some have hourly employees and some have a combination of both. But if you have an annual salary or an hourly wage, do you keep all the money you earn on your payslip?
Not exactly. There are different amounts that get taken from your gross pay. These can include payroll taxes, health insurance premiums or retirement contributions. Plus, there are also different tax rates, post-tax deductions and also voluntary deductions.
So what exactly is your gross pay, then? Let’s take a closer look at how gross pay works, some examples and how to calculate it yourself.
Here’s What We’ll Cover:
What Is Gross Pay?
How much that you earn from your job is going to play a big role in the amount of taxes you pay. So it can be important to understand the difference between your net pay and your gross pay. This can help you better manage personal finances and understand potential earnings increases.
Gross salary refers to the total payment before any tax deductions or mandatory contributions get removed. It’s your base salary or hourly wage, plus any benefits or allowances that you receive. These can include some special allowances, travel allowance, housing allowance or medical insurance.
What’s the Difference Between Gross Pay vs Net Pay?
As mentioned above, gross salary is going to be the total amount that you earn before any taxes or deductions get taken away. For example, if you’re a salaried employee then you might earn £1,200 per week in salary. But, that would be your gross pay.
If you have £250 taken out of your pay as deductions, that results in your net pay, which would be £950. Your net pay is equivalent to your gross pay, minus any and all mandatory deductions.
More often than not your net pay is going to get bolded or be in larger font to help you recognize your actual take-home pay.
What Gets Deducted from Gross Pay?
Your gross pay is always going to be higher than your net pay since there haven’t been any taxes or deductions taken away. And aside from mandatory deductions, there are also some voluntary deductions that can get included. This could have to do with health benefits or savings programs, for example.
Here are some of the most common salary deductions in the UK.
Mandatory Payroll Deductions
Employers are required to deduct payroll taxes from gross salary before cheques or payslips get handed out. There are some varying tax regulations to follow depending on the type of business that you operate and the industry that you’re in. But employers can’t make a deduction without lawful reasoning.
Some of the most common mandatory payroll deductions are:
- Student loan repayments
- Government income taxes
- National insurance deductions
Employees aren’t able to pick and choose what will get deducted from their paychecks. But, you can stay updated on what will get deducted by checking out the details on your payslip.
Voluntary Payroll Deductions
Aside from the mandatory payroll deductions, there are some voluntary deductions, as well.
Some of the most common voluntary payroll deductions are:
- Charitable contributions
- Life insurance premiums
- Health insurance premiums for vision, dental or medical coverage
- Retirement contributions, such as 401(k) or 403(b) plans
- Employer-specific deductions, such as union dues, uniform purchases or flexible savings accounts
How to Calculate Gross Pay
It’s easy to calculate gross pay, you just need to determine if you’re an hourly employee or a salaried employee.
To calculate gross pay as an hourly employee, follow the steps outlined below.
- Figure out how many hours you work each week
- Determine your hourly rate or hourly wage
- Multiply the number of hours worked by your hourly wage to determine weekly gross pay
- Multiply your weekly gross pay by 48 to figure out your yearly gross pay
To calculate gross pay as a salaried employee, follow the steps outlined below.
- Figure out the pay period for your gross pay
- Determine how many pay periods there are in a year
- Multiply your gross pay by the number of pay periods in the year
Regardless if you just received your first payslip or you have been working for years, it can be important to understand the details that are on it. There’s important information on there that includes gross pay, but also your payroll number, net pay and tax code. Knowing what’s included in your payslip helps make sure that you’re getting paid the proper amount.
Your gross pay is the total payment that you receive before any deductions get taken away. These can include tax deductions, voluntary deductions or mandatory deductions. Basically, gross pay is your base salary or hourly wage plus any benefits or allowances you get. When those deductions get taken away you’re left with your net pay.
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