Understanding the Difference Between Gross Pay and Net Pay

The difference between gross pay and net pay is all in deductions. Gross pay is the income you receive directly from your employer before deductions, while your net pay is the income you actually receive after deductions.

So, while gross pay and net pay both refer to income, in one way or another, the meanings of each term are very different and the corresponding figures will also be quite different.

Both figures are important to keep an eye on, even though the latter is the one that’ll be making a real difference in your everyday life. That is, it’s the amount that’ll actually reflect in your bank account at the end of the month.

However, being aware of your net pay allows you to keep track of all the deductions you’re being charged, including things like income tax and contributions to a UIF (unemployment fund), for instance.

 

What is Gross Pay?

 

Gross pay is an individual’s total earnings before any deductions have been made.

For all intents and purposes, it’s the figure that an employee is told they’ll be receiving every month in exchange for the hard work. That is, if John accepts a job at company X with a salary of Y, Y is his gross pay.

Essentially, gross pay is the total of what you’ve earned while working, but it’s not what you’re actually going to receive.

 

How Do You Calculate Gross Pay?

 

Since gross pay is the full amount you are paid by your employer per month (that is, your salary), it doesn’t need to be calculated.

Unless, of course, you’re an hourly worker, in which case you’ll need to multiply the hours you’ve worked by your hourly rate.

For instance, if an employee has worked 40 hours in the week and is set to receive £12 per hour, the calculation will be:

 

40 X 12 = £480

 

Added to this may be additional sources of income from your job including over time.

 

 

What is Net Pay? 

 

Net pay is the amount of money an individual actually receives after deductions have been made from their gross pay.

That means that relevant deductions – things like income tax, UIF, medical aid and so on – have been made from our gross pay, and your net pay is the figure that reflects in your bank account after these deductions have all been factored in.

Now, where net pay becomes a little complicated is in defining deductions. So, the ultimate question becomes, what are these deductions that are resulting in your net pay becoming less than your gross pay?

Firstly, there are normally three different types of deductions: obligatory government deductions, mandatory company deductions and optional deductions.

Specifics regarding these deductions can differ from one place and one company to the next, but here’s what they tend to include:

 

• Obligatory Government Deductions: The main component is income tax, and this is relevant in all countries. In addition to that, however, different governments include various other deductions that are mandatory, including PAYE (pay as you earn). This may include a contribution to an unemployment fund, or in the UK, for instance, it includes National Insurance and student loan repayments, among other things depending on your personal situation. This may include things like paying child support or the repayment of a loan. All these deductions are enforced by law.

 

• Mandatory Company Deductions: Depending on the business in question, you may be required to accept deductions on your salary that contribute to employee benefits. This includes things like retirement fund contributions, group insurance, medical aid and so on. Of course, this also depends on where you live – if your obligatory government deductions already cover insurance, like in the UK with National Insurance, then you won’t be forced to pay insurance again via your company.

 

• Optional Deductions: Optional deductions are pretty self-explanatory, but essentially they’re deductions that individuals have complete control over. They normally contribute to things that employees choose to be part of, including an organisation like a union, for instance. In some cases, when the business in question doesn’t impose mandatory company deductions on things like retirement funds, for instance, these then become optional deductions (but not always).

 

Again, these deductions may differ depending on where you live and the specific company you work for, but whatever the specifics, these are the types of things that’ll be deducted from your gross pay to leave you with your net pay.

 

How to Calculate Net Pay

 

Calculating your net pay is a simple calculation too, as long as you have black-and-white figures, so to speak, of all the deductions you’re required to pay, including government deductions, mandatory company deductions and optional deductions.

Essentially, all you need to do is add all the deductions up and subtract that total from your gross pay.

For instance, if you’re required to pay X, Y and Z in deductions, government, company and optional respectively, this is how you’d calculate your net pay:

 

Gross Pay – (X + Y + Z) = Net Pay

 

Thus, the figure you’re left with after the subtractions is the amount of money that will be reflected in your bank account.

 

The Difference Between Gross Pay and Net Pay 

 

As long as you have all your ducks in a row and are certain about what your gross pay amount is, what deductions you’re legally required to pay, what deductions your company demands and what deductions you’re choosing to pay, working out net pay shouldn’t be too difficult.

Just plug your numbers int the above formulae, and you’ll be able to work out exactly how much money you can plan on receiving at the end of every month.