Gross salary and net salary play an important role in any business’s payroll process. Understanding the difference between net salary & gross salary is necessary to manage financial reports.
It also helps in negotiating a job offer, planning a budget, or simply trying to make sense of the paycheques of employees. The comprehensive differences between them are also essential for personal tax preparation, finance management, and many other financial analysis.
Keeping the knowledge of these terms for a significant impact on financial planning and these are difficult concepts for managers, business owners, and employees. Now the workforce management experts are here to help you and remove your difficulties.
In our article, we will tell you everything that the experts understand in the concepts of gross salary and net salary. Also, explore the distinctions between net and gross salaries and how to use of pie chart calculator to visualise these differences for better financial clarity.
What is Gross Salary?
It is the total amount of money that any employee earns without any deductions. The gross salary is figured out from the salary that is decided at the time of job offers, but it does not represent the actual amount that you earn.
It includes the base salary and counts some additional earnings, these are discussed below:
- Basic Salary: It is an important figure of your earnings that is usually decided at the time of the job interview. Sometimes decided after the job interview when signing the employment contract.
- Allowances: Additional amounts that are sponsored by the well-reputed company to enrich the employees with facilities for different expenses like housing, transportation, or meals.
- Bonuses: It is an extra compensation that is awarded on the base of many factors such as the performance of employees and achieving specific targets, giving huge benefits to the company, and grabbing more clients for the company.
- Other Benefits: This amount includes many benefits such as health insurance, paid time off, and many more. It is mostly given by a multinational company.
How to calculate the Gross salary?
Gross salary is an essential step in understanding employee compensation. This salary shows the total amount an employee earns before any deductions such as taxes and insurance.
The gross salary is calculated by determining the starting salary whether you’re paying an hourly or salaried employee.
Below, we’ll explore the methods for calculating gross salaries for hourly and salaried employees.
1. For Hourly Employees
For hourly employees, you will need to know the two pieces of information:
- Hourly rate: First, know the hourly rate of the employee. This amount pays the employee per hour.
- Total hours worked: Know the total worked hours in a week or month. For this add up all the hours the employee worked during the week or month period.
- Gross Pay Calculation: For the gross pay value multiply the hourly rate by the total hours worked.
The mathematical formula of Gross Salary:
Gross Salary = Hourly Rate x Total Hours Worked During Pay Period
Let’s explore more about the formula with a “real-world” example.
Example: Determine the gross pay of an employee, if an employee worked 40 hours during the pay period with the hourly rate of $20.
Solution:
Step 1: Note the Hourly rate and total worked hours.
Hourly rate = £20, Total hours worked = 40
Step 2: Put the value in the gross salary formula and simplify to find its value.
Gross Salary = 20 x 40 = £800
2. For Salaried Employees
When an employee is hired as a salaried employee and agrees to get a total salary amount every year. To evaluate the gross pay of salaried employees, we have to know two different pieces of information:
- Annual salary: First know the total amount of salary decided at the time of the job interview and the agreed annual pay.
- Number of pay periods: The total number of payments the employee will get in whole periods of a year (e.g., 48 for weekly pay periods).
- Gross Pay Calculation: For the exact gross pay value use the gross salary formula which divides the annual salary by the number of pay periods.
Below is the mathematical formula that makes calculation easy:
Gross Salary = Annual Amount to Pay/Number of Pay Periods per Year
To clarify the concept of how to use the formula, see the below “real-world” example.
Example: An employee hired as a salaried employee and agreed to pay an annual salary of £50,000 while the business operates for 48 weeks; the annual periods are 48 by deducting holidays.
Solution:
Step 1: Note the data from the above statement.
Annual salary = £50,000, Number of pay periods = 48
Step 2: Put the values in the gross salary formula.
Gross Pay = 50,000/48 = £1041.66
Thus, £1041.66 amount paid to employees per week.
What is Net Salary?
Net salary is the actual amount of earnings that employees take home. This amount is received after some deductions that can be subtracted from your gross salary. Net salary is also known as the deposited amount into your bank account. Which you can use for your day-to-day expenses, savings, and investments.
To know about the deductions and net salary see the below points:
- Taxes: It is a deducted amount that is done on the base of some taxes such as Income tax, National Insurance, and other mandatory government withholdings.
- Insurance: This amount is deducted on the base of the contributions for the different types of insurance plans such as health, life, or disability. It’s mostly done by multinational or five-star companies.
- Retirement Contributions: This amount is deducted for pension plans or other retirement savings.
- Other Deductions: These could be union dues, loan repayments, and other voluntary deductions for public or private welfare.
How to Calculate Net Salary?
In the discussion of gross salary vs. net salary, we used different methods to calculate hourly salary and annual salary. Above we used different methods to find gross salaries of hourly paid employees and annual paid employees.
Similarly, the process for figuring out net salary is the same for both types of employees. See the below points for more clarification. By following these steps, you can calculate both gross and net salaries for hourly and salaried employees.
- Find Gross Salary: Start with the gross salary that is calculated using the above methods for salaried and hourly employees.
- Subtract Voluntary Deductions: After the gross amount, subtract the voluntary tax contributions such as health benefits, retirement contributions, or commuter benefits.
The mathematical formula for net salary is stated as:
Net Salary = Gross Salary − Voluntary Deductions
OR
Net Salary = Gross Salary − Voluntary Deductions − Mandatory Taxes
Difference between the Net Salary vs. Gross Salary
See the common differences in gross and net salary.
|
Gross Salary |
Net Salary |
|
Total earnings before any deductions |
Amount received after all deductions |
|
Basic salary, allowances, bonuses, and other benefits |
Salary after taxes, insurance, and other deductions |
|
No deductions applied |
Deductions for taxes, insurance, retirement contributions, etc. |
|
Shows the total amount an employee is offered |
Shows the actual take-home pay |
|
Gross salary is the taxable income |
Net salary is not the taxable amount |
|
Used for job offers, loan applications, and budget planning |
Used for personal budgeting and expense management |
|
Shown as total before deductions |
Shown as “take-home” or final pay amount |
For more clarification see the below table that is taken from the above example.
|
Description |
Gross Salary |
Net Salary Without Mandatory Taxes |
Net Salary With |
|
Gross Salary |
£10,410 |
£10,410 |
£10,410 |
|
Voluntary Deductions |
£200 |
£200 |
£150 |
|
Income Tax |
- |
- |
£200 |
|
Net Salary |
- |
£10,210 |
£10,060 |
Visualising the Difference with a Pie Chart Calculator
One effective way to understand the difference between the gross and net salary is by using a Pie Chart Angle Calculator. This tool provides the visualisation of the data by finding the percentage of the given input values and makes the slices for every value. Here is the home page of this tool.
This pie chart calculator by standarddeviationcalculator.io, it is an online platform that helps students and researchers in analysis of different data.
The pie chart tool helps to represent the salary data visually, how it is distributed across various categories, and making it easier to see where the money goes.
How to Use a Pie Chart Calculator
- Enter Your Gross Salary: First input your total earnings before deductions.
- List Deductions: Add the various deductions with the name in the group section that apply to your salary, such as taxes, insurance premiums, and retirement contributions.
- Generate the Pie Chart: Press the calculate button to create a pie chart that shows the proportion of your salary that goes towards each deduction.
- Analyse the Chart: Use the pie chart to understand the percentage of your salary consumed by deductions versus what you take home.
Example of a Pie Chart Breakdown
If the gross salary is £5,000 per month and the deductions are as follows:
Taxes = £1,000, Insurance = £200
Retirement Contribution = £300, Other Deductions = £100
Put the data in the Pie chart calculator for visuals.
The leaf with a light blue colour is a net salary that is equal to £3,400. A pie chart would clearly show these deductions as slices of the total, with the largest slice representing your take-home pay.
Benefits of Using a Pie Chart Calculator
- Clarity: Visual representation helps to analyse complex data, making it easier to see the impact of deductions.
- Comparison: Easily compare different scenarios, such as the effect of a raise or change in tax rates.
Conclusion
Understanding the difference between net vs gross salary is necessary for financial management. By using a pie chart calculator, you can visualise these differences and gain a clearer picture of your financial details. Gross salary represents the total earnings before any deductions. Conversely, net salary is the actual take-home amount after deductions. Calculating gross and net salaries accurately is crucial for job negotiations, budgeting, and financial planning.
Our article also highlights how using a pie chart calculator can visually simplify these differences. It helps in enhancing understanding and comparison by visualising the results. It empowers you to make effective decisions regarding your earnings and deductions. Whether you’re negotiating a new job offer or planning for retirement, knowing exactly where money goes, this tool can help to take control of your finances.