What Is The Difference?
Gross pay is your employee’s take-home salary plus income tax, employee’s national insurance and any other payments that come out of their salary – such as employee pension contributions, student loans, tax on benefits, tax owed from previous jobs, etc.
Net pay is the money that your employee takes home (or is put into their bank account) every pay day.
Why Do I Need To Know This?
The main point is that you should always agree a gross salary with your employee and put that in the contract. Your employee may want to know what their net pay is, and that’s fine, we can work it out and tell them, but this amount will change if there are changes to their tax position, pension, etc.
Agreeing a gross salary will protect your costs so that you know what you need to pay out each month, and if the amount payable to the government/pension changes it will come out of your employee’s take-home or net pay rather than adding to your costs.
There Are Advantages To The Employee Too
So hopefully the benefits to the employer of agreeing a gross salary are clear – it protects your costs – but there are also advantages to the employee. Every year there is an increase to the Tax Free Allowance (the amount of pay a person gets to keep before the government starts taking tax). This means an annual increase to the employee’s take-home pay which they would not get if they had a net salary agreement. If they had a net salary agreement they would get the same amount regardless of how much tax is taken, so in that case the benefit of the Tax Free Allowance increase would go to the employer.
01 December 2015