Understanding how to calculate gross pay and net pay is essential for every employee in the UK. Whether you want to double-check your payslip, plan your finances, or understand how deductions work, knowing the difference helps you stay in control of your earnings. Let’s break it down in a simple, beginner-friendly way.
What Is Gross Pay?
Gross pay is the total amount you earn before any deductions.
It includes:
Basic salary or hourly wages
Overtime
Bonuses
Commission
Holiday pay
Statutory payments (e.g., SSP, SMP, SAP)
Gross pay is the starting point for all payroll calculations.
How to Calculate Gross Pay
If You’re Paid a Salary
For salaried employees:
Annual Salary ÷ 12 = Monthly Gross Pay
Example:
£36,000 ÷ 12 = £3,000 gross pay per month
If You’re Paid Hourly
Hourly rate × Hours worked = Gross pay
Example:
£12 × 160 hours = £1,920 gross pay
If Overtime Applies
(Overtime hours × overtime rate) is added to your normal earnings.
What Is Net Pay?
Net pay, also known as take-home pay, is the amount left after all statutory and voluntary deductions are removed from your gross pay.
This is the money that lands in your bank account.
Common Deductions That Affect Net Pay
Your gross pay is reduced by deductions such as:
1. Income Tax
Based on your tax code, HMRC determines how much of your earnings are taxable.
2. National Insurance (NIC)
Class 1 NIC is deducted to fund state benefits and pensions.
3. Pension Contributions
Workplace pension contributions under auto-enrolment.
4. Student Loan Repayments
If your earnings exceed the repayment threshold.
5. Other Deductions
Child maintenance
Court orders
Company benefits (e.g., salary sacrifice schemes)
How to Calculate Net Pay
Gross Pay, All Deductions = Net Pay
Example:
Gross Pay: £3,000
Income Tax: £250
NIC: £200
Pension: £150
Net Pay = £3,000 – £600 = £2,400
This is the amount you take home.
Why Understanding These Calculations Matters
Knowing how to calculate gross and net pay helps you:
Understand your payslip
Check for payroll errors
Plan a monthly budget
Know how changes in hours or salary impact your income
Monitor tax and NI contributions
For businesses and employees alike, professional support such as Payroll Services in London can ensure that payroll is processed accurately and in full HMRC compliance.