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How To Calculate Net Pay

How To Calculate Net Pay

Grant Hobson explains in simple terms how to calculate your net pay, taking into account the various deductions. Using a spreadsheet, you can easily convert your annual income to monthly, weekly or daily amounts so that you can assess your budget more easily.

Hi, my name is Grant Hobson, I work as a finance analyst. Today, I'm going to talk you through some business maths calculations and ratios. How to Calculate Net Pay.

Although when we start a job, we might know what our gross salary is for the year, on a month it is more useful to know what the net pay is, what we come out with after we've taken off tax, national insurance, student loans for example. Just so we know our net position and the money, we've then got to carry on with our lives in the month. Hopefully it will be quite a lot but if not, we can determine how we are going to treat ourselves.

So in terms of calculating net pay, there are several criteria that we've got to, we're going to have to take into consideration. So, this section here is basically tax allowances, income tax rates, NI, and student loan rates as at 2010. You can just go online and find these in various places, so it would be of use just to understand them, you'll need these to complete the calculation.

For the example that we are doing below, we are going to say that we are under sixty-five, so the tax allowance is £6,475 and we are going to have a salary of £28,000 which gives us a tax rate of 20%. I've also said that we still have a student loan to pay, and as we're earning above £15,000, then the rate on this is going to be 9%. You'll see all these flow down into the calculation now but this is just good for reference.

For in terms of the example, we can look at yearly, monthly, weekly or even a daily perspective. And you'll see as we go down, we've got the tax allowance, which you need to take off before you calculate the tax on your income, you've got your tax rates, you've got your national insurance element, and then your student loan piece and ultimately down here, we're going to get our take home pay. So the £28,000 goes into your yearly salary, for the monthly we simply divide by 12, for weekly we simply divide the salary by 52, and daily divide by the amount of days that we work in the year.

For tax allowances as we said before, is £6,475 and that's because of the income that we're on, and again that's just divide out by the 12, the 52 and the daily rate, follow the calculation through. So ultimately, we want to work the taxable income for the year, it's £28,000 minus your tax allowance £21,525. The tax rate as we said earlier was 20% so the tax is simply the taxable income multiplied by your tax rate, you see your tax, this is a deduction.

We've got the national insurance calculation which is then a fair reduction of £2,451. So the final piece to be taken into consideration is the student loan. So to get the student loan, we've got an allowance of £15,000 so it's basically your £28,000 income less your allowance gives you £13,000 on which you've got to repay your loan on through the year; so it will be that multiplied by the 9% which should give us a take home pay of £20,073.

So that's simply your gross income, less your tax, less your national insurance, less your student loan and that's your take home pay. Obviously, you may have other deductions coming off your pay if you put into pensions or share schemes at work or any other elements, things that you take part in, you'd have to add these into the equation as you go through. So for this example, the take home pay is £20,073 which is £1,672.

80 a month. .