Gross vs Net Salary: What Comes Off Your Pay, and in What Order
By Akmal Ali · Published · 6 min read
Gross salary is everything you earn before deductions; net salary, or take-home pay, is what is left after income tax, pension and other deductions. On 110,000 a month with 12.5% income tax and a 5% pension, net salary is 110,000 − 13,750 − 5,500 = 90,750. If the pension comes off before tax, the tax is 12.5% of 104,500 and net salary rises to 91,437.50.
A job offer quotes one number, and your bank account receives a smaller one. The gap is not a mistake: it is the difference between gross and net salary, made up of tax, contributions and other deductions. Knowing what each line on a payslip means, and the order in which they are taken, lets you predict your pay and spot an error.
What counts as gross salary?
Gross salary is everything you earn for the period before anything is taken off. It usually includes:
- Base or basic salary: the fixed amount in your contract.
- Allowances: house rent, transport, medical or meal allowances paid with your salary.
- Variable pay: overtime, commission and bonuses, for the period they are paid in.
Some benefits, such as a company car or health cover, have a value but aren’t paid in cash. Whether they count towards taxable pay depends on local rules, so check your payslip rather than assuming.
What comes off to reach net salary?
- Income tax, withheld by the employer and paid to the tax authority.
- Social security or national insurance, where the country has it.
- Pension or provident fund contributions, which are saved for you rather than paid away.
- Insurance premiums, such as a health plan arranged through work.
- Other deductions, such as a salary advance or loan being repaid, or union dues.
Net salary, also called take-home pay, is what is left. The basic sum is simple:
net salary = gross salary − all deductions
Does the order of deductions matter?
For fixed amounts it doesn’t. It matters when one deduction changes the amount another is worked out on. The usual case is a pension or provident fund taken before tax: income tax is then charged on taxable pay, which is gross pay minus those contributions.
taxable pay = gross pay − pre-tax contributions
Here is the same gross salary of 110,000 a month, with 12.5% income tax and a 5% pension, taken in each order:
| A month | Pension after tax | Pension before tax |
|---|---|---|
| Gross pay | 110,000.00 | 110,000.00 |
| Pension (5% of gross) | 5,500.00 | 5,500.00 |
| Taxed on | 110,000.00 | 104,500.00 |
| Income tax (12.5%) | 13,750.00 | 13,062.50 |
| Net salary | 90,750.00 | 91,437.50 |
Taking the pension before tax saves 687.50 a month in this example, which is 12.5% of the 5,500 contribution. That is why pre-tax pension schemes are popular: part of every contribution is money that would otherwise go in tax.
A worked payslip
Many pensions and provident funds are a percentage of basic salary only, not of gross pay. In this payslip the 5% pension is taken on the 100,000 basic salary and before tax:
| Line | Working | A month |
|---|---|---|
| Basic salary | 100,000.00 | |
| House allowance | 10,000.00 | |
| Gross pay | 100,000 + 10,000 | 110,000.00 |
| Pension, before tax | 5% of 100,000 | −5,000.00 |
| Taxable pay | 110,000 − 5,000 | 105,000.00 |
| Income tax | 12.5% of 105,000 | −13,125.00 |
| Health insurance | fixed | −2,500.00 |
| Net salary | 110,000 − 5,000 − 13,125 − 2,500 | 89,375.00 |
Salary Calculator
Enter your salary, allowances and deductions, as amounts or percentages of gross or base pay, with pension before tax if yours is.
Why is one tax percentage only an estimate?
Most income tax uses bands: each slice of income has its own rate, so the share of your whole salary that goes in tax, the effective rate, is lower than the top rate you pay. Suppose, as a simple illustration, that the first 600,000 a year is tax-free and everything above it is taxed at 10%. On 1,200,000 a year the tax is 10% of 600,000, which is 60,000, an effective rate of 5%, not 10%.
To use a single percentage in a calculator, work out your own effective rate from a recent payslip: income tax for the month ÷ gross pay for the month × 100. The percentage calculator does this in its “X is what % of Y” box. For an exact figure, use your tax authority’s own calculator, because bands, allowances and credits change with each budget.
Why does a bonus month look so different?
A yearly bonus is paid in one month, so that payslip shows a much higher gross and, under banded tax, often a higher share withheld as tax. A calculator that spreads the bonus over 12 months shows an average month instead, which is useful for comparing offers but is not what any single payslip will show. The salary calculator shows both: the average month, and take-home pay in a month without yearly items.
How do you check that a payslip adds up?
- Add every earning line and check the total against the gross pay shown.
- Check each percentage deduction against the amount it is based on: gross, basic or taxable pay.
- Add every deduction and subtract the total from gross pay.
- Compare the result with the net pay on the payslip and with the amount that reached your bank account.
A difference of a few units is usually rounding: payroll systems round each line to the cent or the nearest unit. A larger difference is worth raising with payroll, with your own working attached.
Gross and net when comparing job offers
Two offers with the same gross salary can pay quite differently once allowances, pension rules and working hours are counted. Compare net pay a month, and also net pay per hour worked: 100,000 for 40 hours a week is worth more per hour than 105,000 for 48 hours. The salary calculator’s “Compare two job offers” section shows both side by side.
Sales taxes such as VAT or GST are a different kind of tax: they are added to prices, not taken from pay. To add or remove one from a price, use the tax calculator.
Frequently Asked Questions
Why is my first payslip lower than I expected?
A first month is often paid only from your start date, tax may be withheld at a default rate until your tax details reach payroll, and some deductions start at once while allowances start later. Ask payroll which applies before assuming an error.
Is a bonus taxed at a higher rate than salary?
Usually there is no separate bonus rate. The bonus is added to that month’s pay, so under banded tax more of it can fall in a higher band and more is withheld. Where tax is settled over the year, part of that often evens out, but the rules depend on the country.
Is a pension contribution money lost from my salary?
No. A pension or provident fund contribution lowers your take-home pay but is saved in your name, often with an employer contribution on top. Income tax and insurance premiums, by contrast, are paid away.
Should I negotiate on gross or net salary?
Negotiate on gross salary, because contracts, raises and bonuses are based on it. Before you decide, check the net figure for each offer, since allowances, pension rules and hours can make two equal gross offers pay differently.