Understanding How Your Net Salary is Calculated

How your Net Salary is calculated?

Net Pay = Gross Pay - NIC - Income Tax

Out of your gross salary, 2 payments will be deducted:

• Income Tax
• NIC (National Insurance Contribution): contributed by employee and employer

How Income Tax is calculated?

Based on the rates of 2009-2010:

• Earning up to £6,475: No tax! (Personal Allowance)
• Earning between £6,475 and £43,875: 20% tax
• Earning £43, 875 and above: 40% tax

How NIC is calculated?

Based on the rates of 2009-2010:

• Earning between £5,720 and £43,888: 11% (Employee Rate)
• Earning above £43,888: 1% (Employee Rate)
• Earning above £5,720): 12.8% (Employer Rate)

Example1:

So imagine your gross salary is £10,000, so your NIC would be:

Employee NIC: 11% * (£10,000 - £5,720) = £471

Employer NIC: 12.8% * (£10,000 - £5,720) = £548

Income Tax: 0 + 20% * (£43,875 - £6,475) + 40% * (£50,000 - £43,875) = £9,930

Net = £10,000 - NIC - Income Tax = £8,824

Example2:

So imagine your gross salary is £50,000, so your NIC would be:

Employee NIC: 11% * (£43,888 - £5,720) + 1% * ( £50,000 - £43,888) = £4,260

Employer NIC: 12.8% * (£50,000 - £5,720) = £5,668

Income Tax: 0 + 20% * (£43,875 - £6,475) + 40% * (£50,000 - £43,875) = £9,930

Net = £50,000 - NIC - Income Tax = £35, 810

More:

http://www.i-resign.com/uk/financialcentre/tax_calculator.asp

http://www.worksmart.org.uk/tools/tax_calc.php