Gross pay is before deductions, net pay after
Definition
Gross pay: the total amount a worker earns before any deductions are taken off.
Net pay: the amount actually received after all deductions have been taken off, also called take-home pay.
- The wage agreed with an employer is a gross figure, which is why the amount reaching a bank account is always smaller.
- The gap is the deductions, and three of them matter at this level: income tax, National Insurance and pension contributions.
- Net pay is what determines a household's spending power, so it is the figure that feeds into demand in 2.2.5.
Income tax is charged above the personal allowance
Definition
Income tax: a tax on the income a person earns, collected by HMRC and charged at rising rates on income above a tax-free allowance.
- The first slice of income is tax free, and in 2026/27 that Personal Allowance is £12,570 (Source: GOV.UK).
- Income above it is charged at 20% up to £50,270, then 40% up to £125,140, and 45% above that.
- Only the income inside a band pays that band's rate, which is why a higher-rate taxpayer does not pay 40% on everything.
- Income tax is a direct tax in the sense set out in 3.5.1, and it is progressive in the sense set out in 3.5.7.
National Insurance is a second charge on earnings
Definition
National Insurance: a separate contribution paid on earnings, which builds entitlement to the State Pension and some other benefits.
- Employees pay Class 1 National Insurance at 8% on earnings between £12,570 and £50,270 a year, and 2% on anything above that (Source: GOV.UK).
- It uses its own thresholds rather than the income tax bands, so the two deductions have to be worked out separately.
- Employers pay their own National Insurance on top, which is a cost of employing someone rather than a deduction from the worker's pay.
- The rate above the upper limit falls to 2%, so National Insurance takes a smaller share of a very high income than of a middling one.
Pension contributions are taken from pay too
Definition
Pension contribution: money paid out of earnings into a pension scheme to provide an income in retirement.
- Most employees are enrolled automatically, and the minimum total contribution is 8% of qualifying earnings, of which the employer must pay at least 3% and the worker 5% (Source: The Pensions Regulator).
- Qualifying earnings are the slice between £6,240 and £50,270 a year, so the percentage is not applied to the whole salary.
- A pension contribution is not a tax, because the money remains the worker's own savings rather than going to the government.
Common Mistake
- Do not apply the income tax bands to National Insurance, since it has its own thresholds and its own rates.
- Do not describe a pension contribution as a tax, because it is deferred pay rather than money taken by the state.
Reading a payslip from gross to net
- A payslip lists gross pay at the top, each deduction separately in the middle, and net pay at the bottom.
- The deductions should add up to the difference between the two, which is the quickest way to check a payslip is right.
- How each deduction is calculated is worked through in 2.7.4.
Exam technique
- Name the three deductions the specification lists, because an answer that mentions only tax is incomplete.
- Say which figure you are quoting, since a salary is gross and take-home pay is net.
Self review
- What is the difference between gross pay and net pay?
- What is the Personal Allowance for 2026/27?
- At what rate do employees pay National Insurance between £12,570 and £50,270?
- What is the minimum employee pension contribution under auto-enrolment?
- Why is a pension contribution not a tax?
