Salary and pay
Salary usually refers to the amount of money a person earns over a year. For example, if a shop assistant has a salary of £18,000 per year, his/her monthly pay would be £1,500 (\(\pounds18,000 \div 12 \:\text{months}\)). £1,500 is the gross pay.
- Gross pay is the full amount paid to an employee before any deductions are made.
- Deductions are income tax, national insurance and sometimes pension contributions.
- Net pay is what's left after deductions have been made from gross pay. This is the amount an employee actually receives.
Example
If the shop assistant has to pay tax at a rate of 20% and has to pay £100 national insurance then what is his/her net pay?
Tax to pay = \(\pounds 1,500 \times 0.2 = \pounds 300\)
National insurance deduction = £100
Net pay = \(\pounds 1,500 - \pounds 300 - \pounds 100 = \pounds 1,100\)
£1,100 is their net or 'take home' pay.
Deductions
The employee pays income tax directly to the government. It is a percentage of the gross pay depending on how much is earned - the more you earn, the higher the percentage. People earning below a threshold pay level don't need to pay income tax at all.
- National Insurance is the system of contributions paid by all working people for state benefits such as the NHS, schools and state pension.
- A pension is a special savings fund that is built up during a working life to provide an income during retirement.
Example
Stephanie’s pay is £420 per week.
She works for 37½ hours per week.
Work out her hourly rate.
\(\pounds 420 \div 37.5 = \pounds 11.20\)
Question
Stephanie wants to work out her annual salary. She says:
"There are 4 weeks in a month, so I will multiply £420 by 4.
There are 12 months in a year, so I will multiply the answer by 12: \(\pounds 420 \times 4 \times 12 = \pounds 20,160\)"
Does her method give the correct amount for her annual salary?
No, Stephanie's yearly pay is more as there are 52 weeks in a year and this method only gives \(4 \times 12\) = 48 weeks.