Net pay vs gross pay
Gross pay is the total amount an employee earns in a pay period before anything is taken off — salary, overtime, bonuses, commission, and statutory pay all count. It is the number your employment contract or offer letter refers to when it says "salary of £X per year".
Net pay is what remains after deductions are applied. The order in which deductions are made matters because some reduce the figure that other deductions are calculated on:
- Pre-tax pension contributions (salary sacrifice) — deducted first, before tax or NI is calculated. This reduces the taxable and NI-liable pay, saving both employee and employer money.
- Income Tax — calculated by PAYE on the taxable pay remaining after any salary sacrifice. The employee's tax code and the year-to-date totals determine the amount.
- National Insurance — calculated on the same pay period's earnings above the Primary Threshold, independently of Income Tax. See National Insurance for thresholds.
- Student loan repayments — deducted via PAYE at a percentage of earnings above the plan-specific threshold. Which plan applies depends on when and where the employee studied.
- Post-tax pension contributions — any pension paid from after-tax pay (relief-at-source scheme) is deducted after Income Tax and NI. The scheme then claims basic-rate tax relief directly from HMRC on the employee's behalf.
- Other deductions — childcare vouchers (legacy schemes), cycle-to-work scheme repayments, court attachments, and any contractual deductions authorised in writing.
Each deduction appears as a separate line on the payslip. The final number at the bottom is net pay.
Common misunderstandings
"Salary" almost always means gross. When someone says "I earn £40,000", they mean their gross salary. Banks, recruiters, and HMRC all work in gross terms. Net pay is the personal reality — it is what actually clears in the account — but it is not the number used in financial planning, mortgage affordability checks, or job advertisements.
Mortgage applications want gross, not net. Lenders calculate affordability as a multiple of gross annual income. They will ask for P60s and sometimes payslips as evidence — both documents show gross pay prominently. Net pay is visible on the same documents but is rarely the figure lenders work from.
Payslips show both, side by side. UK payslips are required to show gross pay, an itemised list of deductions, and net pay. This means any employee can reconcile from one number to the other. If the net figure looks unexpectedly low, the payslip deduction lines will usually identify the cause immediately — a tax-code correction collecting prior underpaid tax, a new student loan deduction, or a pension contribution increase are the most common culprits.
When net pay swings month to month
Net pay is not always the same figure each month, even for salaried employees. Several things can move it:
- Bonuses or overtime push gross pay up, which moves some income into a higher tax or NI band in that period, producing a sharper drop than the bonus itself might suggest.
- [Tax-code](/glossary/tax-code) changes take effect from the payday after the code is issued. A correction that collects underpaid tax from earlier in the year will depress net pay for one or more periods.
- Statutory pay — Statutory Sick Pay, Statutory Maternity Pay — replaces normal pay at a lower rate, reducing net pay in those periods.
- Student loan threshold crossings can switch a deduction on or off mid-year if pay varies.
- PAYE's cumulative calculation generally smooths the year-end position. By April most employees have paid roughly the right tax in total, even if individual months were uneven. Any residual underpayment is usually collected via a revised code in the following year rather than a bill.