What You Need To Know About Gross and Net Salary

If I were to take a wild guess, your job status reads “employed” and you’re probably working at a prestigious firm or a small company. Either way, we’re certain this article will do you a lot of good!

Every employee works to be paid a certain amount per month and not just paid but paid appropriately. You can guarantee the process is done right by familiarizing yourself with every monthly or annual paycheck you receive and keeping track of your salary record. One of the ways to do this is by seeking out information on what elements are at play when you get paid.

Whether you’re under an annual salary plan or are paid wages by the hour, you must have come across two distinct figures on your paycheck. They’re elements of pay termed Gross and Net Salary/ Pay which have been covered extensively in this article!

The values of gross and net salary on your paychecks will help you know the total amount you receive as salary, be aware of deductions made from that amount, and the final revenue after all deductions have been taken out. We have gathered all the facts you need to know in this one compact article.

First off, here’s what you should know about GROSS PAY;

A good place to start would be knowing what Gross Pay is about and why you should bother with this information.

Gross pay primarily encompasses your total salary amount without any deductions taken out. It comprises your total income from the major source of employment or other sources of income before the payment of taxes or any other statutory deductions. Considering that this payment hasn’t been taken from, it is easy to infer that it will be the highest number on your paycheck.

An employee’s gross pay usually includes the period they’ve worked, overtime or extra hours they put in at work, tips or profit they’ve received, and any other financial compensations they’ve earned during their time working. Gross pay is subject to change if an employee receives a raise, or other compensations and benefits.

A practical illustration of this type of pay is when a job offers #3 million per year as annual income for a specific job role excluding deductions. The salary amount offered is the gross pay of that employee that will decrease when all the necessary deductions and taxes are taken out.

Many individuals are only concerned with the final amount accessible to them after all deductions have been made (net pay) and do not bother to know the value of their gross salary. However, knowledge about your gross pay (annual or monthly) is invaluable. One major reason why you should know your gross pay is if you have intentions of lending money. When you’re applying for a loan or making any large investment that requires a loan, the lender usually asks for your gross salary amount to estimate your salary and how much you earn after deductions have been made. Credit card companies also rely on this information as well as employers at the companies you have sought out employment with.

Let’s switch over to NET PAY;

Every worker wants to know their net pay and it only makes sense that it has every employees’ attention considering it is the key player in their personal financial planning and budgeting.

Net Pay refers to the final amount (salary) that will be accessible to an employee after all obligatory deductions have been subtracted. This is the amount that goes into the bank account and it is the figure reflected on your pay statement.

Usually, it is the lesser of the two numbers on your paycheck and is expressed on your paycheck in a way that you can easily tell your net salary from your gross salary.

Net pay is important as it guides an employee’s financial planning process as stated above. Knowing how much is available to you after all the deductions have been made will help you make informed decisions when budgeting and allocating expenses. The major distinction between the gross and net pay is that, unlike the gross pay, lenders are not concerned about your net pay and are likely to not ask about it.

Also, another key detail to note is that net salary will not be uniform for every employee working in the same company but different job roles or at different companies with the same job roles. Even though you may be receiving the same amount of gross pay as another employee, the net pay you eventually receive may differ significantly for many reasons.

Deductions made from Gross Pay

Now, you know deductions are made from your gross pay but just what type of deductions are being subtracted?

The mandatory deductions (tax reliefs) to gross salary as proposed by the Federal Inland Revenue Service (FIRS) include common taxes like Federal Income Tax, State tax, Pension contributions, National Health Insurance Scheme (NHIS) contributions, National Housing Fund (NHF) contributions, Gratuity, Life assurance payments amongst others.

In addition, your employer or HR manager can deduct from your gross pay for other reasons like leave adjustments, loan repayments, health plans amongst other deductions.

How is Net Salary calculated in Nigeria?

The basic formula for calculating your Net salary is;

Gross Pay – Deductions = Net Pay

The salary included in your employment contract will be your gross pay as expressed above. In order to calculate your net pay, you need to have the data as regards all the deductions being made from your gross pay. Once you have that information, all you have to do is take out the former (deductions) from the latter (gross pay). The final amount is your net salary. It’s that easy.

If you spend days or weeks computing payroll you will find PrimePayroll’s “Payroll on Autopilot” feature both exciting and time-saving! At employee setup, there is an automatic linkage to a predefined system pay structure. This enables automatically generated payroll monthly with all necessary calculations accurately computed.

PrimePayroll lets you configure your salary, pre-define pay item type percentages, automatically breaks down your gross, and lets you do gross to net calculations taking into account all statutory deductions that are required. This takes away the manual calculations that you need to do every time a new employee is hired!