Gross vs Net income UK: Comparing the two

When you start earning an income in the UK, it’s important to know exactly what you’ll be taking home each month.

And the reality is that there can be a big difference between your gross income or gross pay and your net pay.

If you’re wondering what those differences are, we’re going to look through some of the most common.

Gross income vs net income

Your gross income is generally the highest on your salary reports.

This represents the amount your job gives you according to your agreed salary as total, and what you’ll probably tell other people that you earn.

When most people say that they earn £50k or £100k per year, they’re talking about their gross salary. But technically, this isn’t a good representation of what you actually earn.

Rather, your net income is what comes in when your contributions and taxes are taken out of the net income. Your National Insurance contributions, your pensions, your tax – everything.

Basically, the gross income is the same without any deductions, and the net income is the same with deducations in place.

If the usual earnings are £3000 a month, and you then pay £500 in contributions, tax and pensions, your net income is £2500, whilst your gross income is the full £3000.

What is gross salary?

Gross wages are the total amount the worker received in advance of any deduction from tax or mandatory contributions.

This sum equals the base salary plus benefits and allowances including overtime pay, medical expenses allowance, travel insurance and home allowance.

We usually use the term salary to talk about your annual earnings, whilst income may refer to your monthly earnings. Your gross pay or salary may be £100k annually, and your take home pay of £80k is net pay.

In comparison, your gross monthly income may be £5k, with a net income of £4.2k.

There’s not a massive difference between gross pay and gross income, but the terms used can be pretty confusing.

How to calculate gross salary?

The calculation of your gross salary will vary according to the amount of your salary and how much you earn per hour.

You can use a salary calculator to work out exactly what your gross salary is depending on your hourly rate.

The most common allowances on your payslip

Looking at your payslip may feel like looking at an old math test – confusing. Fortunately, it’s usually quite easy to determine what’s what.

The truth is that a person’s allowance can be earned tax-free in some cases – if you earn below a certain amount, you won’t need to worry about paying taxes.

When you’re over your tax-free allowance, everyone has to pay tax and national insurance contributions on their earnings – this is completely normal.

You can check out the National Insurance rates for more details on what they are exactly.

However, some other very common deductions from your salary are;

  • A pension, if you’ve signed up to one.
  • Student loan payments, which will be taken when you earn over a certain threshold (assuming you have a degree, obviously).
  • Child maintenance payments if you have them to make.
  • Potential deductions for any court orders.
  • Any previous lending or paybacks that you owe your employer.

Aside from this, the only other thing that you’ll have to pay is your regular tax, which depends on your tax code.

What is a good salary in the UK?

The higher your earnings above the median pay, the better your standard of living in the United Kingdom.

The median monthly wages vary each year, but it’s heavily dependent on where you are in the country.

If you’re based in London, you’ll hope to be earning more than those outside of London. The average salary is £32000 across the UK, so you’d like a little bit more than this if you’re inside London.

And, if you’re living outside London, you can easily get by on less than this too.

Conclusion

What you earn in your work will influence how your taxes are calculated, as well as your growth as a professional. It is important to know what your salary is, and to know how much tax you’ll be paying on what you earn.

Whilst this doesn’t matter as much if you’re employed, it becomes increasingly important if you even want to start your own business or become a freelance worker.

When you have to pay your own fees and taxes, it becomes a lot more complex to know exactly what you should and shouldn’t be paying to the government on your earnings.

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Edward

Edward brings years of experience in a variety of different fields including online marketing & No-code app development, and he's been investing in stocks and cryptocurrency since 2016. Outside of work you'll usually find him watching movies at the local cinema or playing games in the Apple Arcade.

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