It is easy to mix up gross pay with net pay as a recent graduate who has just gotten a corporate job in a standard organisation.
However, being able to identify the differences between net and gross salary is important, as this will help you in achieving effective financial planning, including determining your budget and savings accordingly.
Let’s start by defining what Gross Salary is.
What is Gross Salary?
In understanding the differences between net and gross salary, you must know what net and gross salary is.
Let’s define the latter first. Gross salary is the total amount of money you earn as an employee before deductions. It is also referred to as gross income. Since it is the total amount of money earned before deductions, it includes:
Basic salary
Allowances
Bonuses
Overtime pay (if any)
Other Benefits
Basic Components of Gross Salary
Basic salary: monthly or annual pay.
Allowances, such as housing, clothing, or transportation.
Bonuses: performance-based or retention bonuses
Benefits, which includes retirement plans, health insurance, etc.
What is Net Salary?
Net salary represents the actual disposable income which allows you to manage your expenses effectively, including achieving financial stability and financial security for the future. It is the remaining amount from your earnings after deductions. It is called take-home pay for a reason.
The deductions that makes it transform from gross to net are:
Income Tax
Health insurance premiums
Retirement plan contributions
Cooperative society contribution
Voluntary deductions
Other deductions
How to Calculate Net and Gross Salary
Net salary in Nigeria is calculated by identifying what makes up the gross salary such as basic salary, allowances, bonuses, and benefits.
Next, the contribution rates for voluntary and mandatory deductions are determined.
Thirdly, the deductions are subtracted from gross salary
Lastly, the amount derived from the third step is determined as net salary.
For example:
Gross Salary = xxx xxx
Deductions:
PAYE Tax = xx xxx
NHF = xx xxx
NHIS = xx xxx
Pension = xx xxx
Other deductions = xx xxx
Total deductions =
- Total deductions = xxx xxx
- Net salary = xxx xxx (xxx – xxx)= xxx xx.
Here is a further illustration in Nigerian naira.
Gross Salary: N650,000.
Deductions:-
PAYE Tax (10%): N65,000
NHF (2.5%): N16,250
NHIS (5%): N32,500
Pension (8%): N52,000
Other Deductions: N10,000.
Total Deductions: N175,750.
Net Salary: N474,250 (N650,000 – N175,750)
To easily remember what net and gross salary is, note this: net salary is my actual take-home pay, while gross salary is my total earnings before deductions.
For personalised guidance on all matters related to tax for businesses and organisations, the Federal Inland Revenue Service should be consulted.
