Oftentimes as a newly employed staff of a company, you are amazed at the take-home pay disbursed into your account after deductions.
This could happen for the first few months, but after a while you get acquainted with the term “net salary.”
Net Salary is paid in order to provide you as an employee your actual take-home pay, enabling you to have financial planning that is effective, as well as budget and savings. Getting paid net salary is not optional, it is necessary because it reflects deductions from gross salary.
The deductions, depending on the voluntary and mandatory deductions guiding the labour laws in your country could include income tax, health insurance premiums, retirement plans, and so on. 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.
What is Net Salary?
Simply put, you can just take net salary to be what you get at the end of work. It is why it is referred to as take-home pay – it is what is left from your earnings after deductions. In Nigeria, net salaries are calculated as depicted below:
First, gross salary components are outlined.
Gross Salary
Basic salary: this could be in terms of what you earn monthly
Allowances: this includes housing, transportation, or clothings.
Bonuses: usually performance-based.Overtime: depending on your job.
Benefits: retirement, health insurance, etc. Next, are the steps taken for deductions.
Deductions
The deductions from your gross salary could be voluntary or mandatory. Some of these deductions include:
Pension contribution, National Housing Fund, Pay As You Earn, National Housing Fund Contribution, Cooperative Society contribution, etc.
How To Calculate Net Salary in Nigeria
To have the appropriate method of calculation, it is important to familiarise yourself with the Federal Inland Revenue Service, National Pension Commission, and the National Health Insurance Scheme contribution rates for tax, pension, and health insurance premiums.
Net salary in Nigeria is calculated by highlighting 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.
Let’s take a look at this example:
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)
What is Annual Net Salary?
Annual net salary is the total salary you get for a year, after deductions. There are 12 months in a year, try calculating the take-home pay you received monthly and multiply by 12 to get your annual net salary. Annual Net salary is derived by calculating the subtracted deductions that are mandatory and voluntary from your annual gross salary. The deductions are pension contribution, health insurance premiums, tax, etc.
As an employee, your annual net salary does not only provide you a comprehensive understanding of your disposable income, it helps you achieve effective financial planning, as well as budget and savings.
