Gross Pay Vs. Take Home Pay: Understand the Differences

Do you want to calculate your monthly wage? And you are confused between gross pay and take-home pay? If your answer is a yes then stick to this page to get you a clear answer.

We have added a take-home pay calculator on this website for the convenience of our visitors who want to calculate their salaries. The tool is user-friendly and anyone can calculate their monthly or yearly income easily.

When you use that calculator, you will see two types of income. One is gross income and the other is net income. And these two wages are not the same if you are thinking. To get the exact answer, you should read this guide thoroughly.

What is Gross Pay?

In simple words, your gross pay is the total amount that you have earned or paid by your employer. This payment includes all the bonuses, allowances and other payments. However, there are some taxes and other payroll deductions that will be deducted from your gross income.

Let’s assume:

You are an employee who is earning £15 per hour and you work 40 hours a week.

To calculate gross pay, you multiply the hourly rate by the number of hours worked:

• Hourly rate: £15/hour
• Hours worked: 40 hours

Gross pay = Hourly rate * Hours worked

= £15/hour * 40 hours

= £1600

So in this example, £1600 is your gross pay that you have earned during the complete month.

What is Net Pay or Take-Home Pay?

The net pay is the final payment that an employee gets after paying all the taxes and deductions. This is the final amount that will be deposited into the employee’s bank account. However, here are the types of taxes that will be deducted from your gross pay.

State Income Tax Withholdings:

When it comes to income taxes, there are many types of it. If we specifically talk about the state income tax then some states have their tax rates and imposions. These taxes will be deducted from the gross payments.

Federal Income Tax Withholdings:

This is the type of tax that is directly proportional to the monthly earnings of a citizen. It is called progressive tax brackets.

National Insurance Contributions (NICs):

National Insurance Contributions (NICs) are deductions made to fund state benefits including the State Pension, Maternity Allowance, and Jobseeker’s Allowance.

Health Savings Accounts (HSAs):

Your payslip will also have a deduction of health savings accounts (HSAs). This is the health insurance that you will pay every time you get a paycheck.

How to Calculate Take-Home Pay Income?

With the help of this formula, you can easily calculate the take-home pay or net pay from your salary slip. Just follow these steps:

• Start with Gross Income: You need to start with your gross income which is the total amount you have earned without paying any tax. This will also include all the bonuses, hourly rates and all commissions.
• Deduct Taxes: Now you need to subtract all the taxes that you owe to pay. These are the types of taxes that will be subtracted from your gross salary.
  • Federal income tax
  • National insurance contributions
  • Health savings accounts
  • State income tax
• Subtract Other Deductions: Now deduct any other mandatory deductions from your gross pay, such as:
  • Retirement contributions (e.g., 401(k) contributions)
  • Health insurance premiums
  • Other benefits deductions
• Calculate Take-Home Pay: Once you minus all these taxes, you will get only your net pay or take-home payment. This is the amount that you will get on your paycheck or bank deposit.

Why is My Gross Pay Higher Than Take-Home Pay?

With simple mathematics, you will understand why your gross income is higher than your net income payment.

For example, you are working in a private company where your pay rate is £15/hour. Now you will be making £15/hour x 8 hours = £120 per day.

Your monthly wage will be  £120 x 30 days =  £3600. And your yearly gross income will be £3600 x 12 months = £43200.

Now  £43200 is the gross payment that you have earned while working throughout the year. However, this is not your final payment that you can take. You need to pay governmental taxes, insurance premiums and other taxes before you get your final payment.

After deductions of all those charges and taxes, you will get a lower amount than you have actually earned. So this is the reason that your gross pay is higher than to your net pay as you have paid some taxes to the government.

F.A.Q

Is it better to be paid gross or net?

It is better to get paid in gross pay. This will help you to stay informed about what you have earned as a whole. While the net pay is the only pay that is subtracted from all the taxes and deductions by the government and employer.

How do you work out gross pay from net pay?

The simple formula to calculate your net pay from gross pay is to minus all the taxes and mandatory deductions from your gross pay and the remaining amount will be your take-home pay.

What is the difference between gross and net?

The major difference between gross and net is the deduction of the taxes. The gross is the complete money that an employee or citizen has earned. While the net amount is the actual amount that an employee can use after paying all the taxes.

What is the formula for calculating gross pay?

You need to simply subtract all the taxes from your gross pay and the rest of your payment is the net pay.

Why is my net pay higher than my gross pay?

Your net pay should never be higher than your gross pay under normal circumstances. However, here are a few possible reasons why this might happen:

• Reimbursement or Overpayment
• Error in Deductions
• Bonuses or Benefits
• One-Time Adjustments

What is the tax code 1257L?

1257L is the most common tax code in the UK. Most of the people are connected with this tax code.