Gross to net pay in the United Kingdom: how it works
Reviewed by Mellow Editorial Team, HR & payroll content team
Gross pay is what you agree to pay an employee; net pay is what actually lands in their bank account. The difference is made up of income tax, National Insurance contributions, pension deductions, and any other agreed or court-ordered amounts — all of which the employer is responsible for calculating and remitting correctly.
What counts as gross pay
Gross pay is the full amount owed to an employee before any deductions. It includes basic salary or hourly wages, overtime, commission, bonuses, and most taxable benefits paid through payroll. If you bring in a contractor through a PAYE arrangement, their gross figure is calculated the same way.
Getting gross pay right matters because every downstream calculation — tax, NI, pension — flows from it. Errors at this stage compound through the rest of the payroll run.
Income tax: how it reduces take-home pay
Most employees in England, Wales, and Northern Ireland are subject to income tax under PAYE (Pay As You Earn). The key figures for the 2026/27 tax year are:
- Personal allowance: £12,570 — earnings below this threshold are not taxed
- Basic rate: 20% on earnings above the personal allowance up to the higher-rate threshold
- Higher rate: 40% on earnings above the higher-rate threshold
- Additional rate: 45% on earnings above the additional-rate threshold
Each employee has a tax code issued by HMRC — usually based on their personal allowance — and you apply that code to calculate the correct tax for each pay period. If an employee has multiple jobs, their personal allowance is typically assigned to one employer only.
Scotland has its own income tax bands, which differ from the rest of the UK. If you employ someone with an S prefix on their tax code, different rates apply; HMRC's PAYE tools handle this automatically if your payroll software is set up correctly.
National Insurance contributions
Both employees and employers pay National Insurance, but they are calculated differently and serve different purposes in the payroll process.
Employee NI is deducted from gross pay, reducing net pay directly. The rate is 8% on earnings between the primary threshold and the upper earnings limit, then 2% on anything above that.
Employer NI is not deducted from the employee's gross pay. It is an additional cost borne by the business — 13.8% on earnings above the secondary threshold. This means your actual cost of employing someone is always higher than the gross salary figure. When budgeting for a hire, factor in employer NI on top of the agreed salary.
Both thresholds are set by HMRC and reviewed each tax year. Your payroll software should apply the current thresholds automatically, but it is worth checking at the start of each tax year.
Pension auto-enrolment deductions
If an employee meets the eligibility criteria for auto-enrolment, pension contributions are deducted from their pay as part of the gross-to-net calculation. The minimum contributions under auto-enrolment are:
- Employer minimum: 3% of qualifying earnings
- Employee minimum: 5% of qualifying earnings
Qualifying earnings are calculated on a band of earnings set by The Pensions Regulator — not necessarily the employee's full gross pay. Both contributions are calculated on this banded figure, not the total salary.
Employee pension contributions reduce net pay. Employer contributions do not reduce the employee's net pay but do add to your total employment cost. Depending on your scheme, contributions may be taken before or after tax, which affects the employee's take-home differently — a relief-at-source scheme adds basic-rate tax relief to the pension pot, whereas a net pay arrangement deducts contributions from gross pay before tax is applied.
Other deductions and the final net figure
Once tax, NI, and pension are accounted for, other deductions may apply:
- Student loan repayments — Plan 1, Plan 2, Plan 4, or Postgraduate, each with different thresholds and rates notified by HMRC
- Attachment of earnings orders — court-ordered deductions for things like child maintenance or debt repayment
- Salary sacrifice arrangements — voluntary deductions agreed in writing, such as cycle-to-work or additional pension contributions, which typically reduce gross pay for NI purposes
Net pay is what remains after all of these deductions. It is the figure transferred to the employee's account on payday.
Reporting to HMRC
Every time you run payroll, you must submit a Full Payment Submission (FPS) to HMRC on or before payday under Real Time Information (RTI) rules. This tells HMRC what gross pay each employee received, what deductions were made, and what you owe in tax and NI.
At the end of the tax year, employees must receive a P60 by 31 May. If any employees received taxable benefits outside of payroll — such as company cars — a P11D is due by 6 July. Keeping your gross-to-net calculations accurate throughout the year makes both of these year-end obligations significantly more straightforward. For employers managing staff across multiple countries, how Mellow runs payroll across six countries on one platform shows how these obligations can be handled consistently at scale.
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