Net Pay: What It Is and How To Calculate It

Net pay is the amount an employee takes home after all relevant deductions are taken out. Deductions include mandatory payments like income tax and National Insurance Contributions (NIC), as well as voluntary payments like additional insurance purchases, salary sacrifice cars and extra pension scheme payments.

Net pay is the actual amount that’s deposited into an employee’s bank account after all necessary deductions are made. Employers are responsible for accurately calculating those deductions, taking proper steps to withhold those amounts and directing those funds to the appropriate recipients. Net pay is also important to keep in mind when posting job adverts, as the take-home pay may be far from the posted salary, or gross pay.

For employees, net pay is the money they get to take home after all deductions have been made from their total pay, also called gross pay. This information is essential for planning expenses and understanding what they need to purchase that does not come out of their paycheque. It’s also important to keep in mind for salary negotiations, as the advertised salary shrinks quite quickly once deductions are made. 

The differences between net and gross pay are straightforward. Net pay is the money that lands in an employee’s bank account after the company deducts any required or voluntary contributions. Gross pay refers to total earnings before deductions. It is the amount listed on the job advert and utilised in all formal aspects “on paper” as to the employee’s salary.

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The first step to calculating annual net pay is finding your gross yearly salary. An employee can find this information in their employment contract or on their payslip, abbreviated as “GP.” After getting that information, add up the deductions taken from gross pay over the course of a year and subtract them from the gross pay. The final number is annual net income. 

The actual equation you’d use to calculate net salary is: 

(yearly gross income) - (total of yearly deductions) = annual net pay

For example, say an employee makes a gross income of £70,000 annually and that their deductions total £20,000. The calculation would break down like this:

£70,000 - £20,000 = £50,000 annual net income 

Net pay is the amount an employee takes home after relevant deductions. Gross pay is the amount of money a company offers an employee before deductions. 

Find the gross pay and the amount of the deductions in a weekly, monthly or yearly period. Subtract the deductions from the gross pay to find the net pay amount. 

Add the total amount of deductions in a weekly, monthly or yearly period to net pay to get gross income.

Getting deductions right is one of the most important aspects of HR, ensuring employees are paid accurately and on time with each pay cycle. Personio can help with that. 

Our all-in-one HR platform automates the payroll process, tracking and withholding deductions from gross pay in just a few clicks. Employees can see their net pay and all deductions removed from their paycheque with ease, so they can feel equipped to make the best decisions about the money they take home each pay period. 

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