What is gross pay?

Gross pay represents a worker’s overall pay in a given period before any deductions like tax or pension contributions. As such, it is the baseline figure for processing statutory obligations and take-home salary.

What constitutes gross pay for UK businesses?

For UK finance and HR professionals, gross pay is the starting point of the monthly payroll calculation process, as the full remuneration agreed in employment contracts. Importantly, this figure encompasses all financial rewards a staff member earns, not just the base salary.

What are the main components of gross income?

To correctly determine your tax liabilities, you must account for every element of compensation. Gross income includes the annual salary divided by the pay period, but also often extends to incorporate further components.

The most common components include:

• Wages for hours worked.

• Overtime payments.

• Bonuses and sales commissions.

• Holiday pay and other statutory payments (like Statutory Sick Pay).

How are benefits-in-kind treated?

Non-cash perks also play a role. Benefits-in-kind, such as company cars and private health care, often have to be processed via payroll. Missing any of these figures when you calculate gross pay will lead to incorrect tax submissions and potential fines.

What is the difference between gross pay and net pay?

The distinction is critical. Gross pay is the employer’s contractual obligation, while net pay is the worker’s ‘take-home’ pay.

How does gross pay determine tax liability?

Gross pay acts as the starting point for all fiscal assessments, and is therefore the basis for PAYE calculations and Income Tax and National Insurance (NI) liabilities. Unlike in other countries’ tax systems, United Kingdom employers effectively act as the primary tax collector based on this total figure.

What are the employer’s responsibilities regarding deductions?

Employers are legally responsible for verifying and subtracting the correct amounts. You will therefore likely need to deduct pension contributions, student loan repayments, and attachments of earnings (AEO). The latter may derive, for example, from court orders involving unpaid council tax, child maintenance arrears, unpaid court fines, or civil debts.

These are subtractions from the gross salary that you are responsible for managing. If the gross figure is wrong in the first place, the net output and payments to HMRC will inevitably be incorrect as well. This is why it is so important to get the gross pay figure right.

The journey from gross to net

How do you calculate gross pay correctly?

The method you use to determine gross pay depends entirely on the employment contract.

How is gross pay assessed for salaried staff?

For salaried staff, you would divide the annual salary by the number of pay periods in the year (usually 12 months or 52 weeks). This provides a stable figure that will only change with specific monthly adjustments or bonuses.

How do you handle hourly and variable pay?

For hourly workers, the process is more dynamic. You must multiply aggregate hours worked in the period by the agreed hourly rate. If you operate in sectors with variable shifts, such as the services or hospitality industry, accurate time tracking is absolutely essential.

You must also ensure the gross pay sum meets the National Minimum Wage, which saw significant increases in April 2025.

What regulatory changes affect payroll in 2025/2026?

The fiscal landscape shifted in April 2025, and these changes remain in full force throughout 2026. The upshot is that business leaders must adapt to higher costs.

How have the NI hikes impacted employer costs?

Recent reforms increased Employer NI contributions to 15%, and reduced the Secondary Threshold, at which employers must start paying Class 1 National Insurance contributions on an employee’s wages, down to £5,000.

The dual impact of these changes means the cost to the business for every employee earning above the threshold has risen significantly. For the government, this revenue helps fund public services, including, in particular, state pensions.

Have other allowances, thresholds and wage rules changed?

Yes, the Employment Allowance increased to £10,500, offering some relief to smaller businesses. Additionally, the Lower Earnings Limit (LEL) increased to £6,500. Reaching this gross pay threshold allows employees to accrue state benefits, even if their earnings remain below the Primary Threshold at which NI payments actually begin. Importantly, the National Living Wage also rose, increasing the baseline cost for lower-paid staff.

Key 2025/2026 rates and thresholds

Why is strict compliance crucial for growing SMEs?

Navigating regulations and compliance requires vigilance and consistency. Errors damage trust with your staff and may lead to penalties from HMRC.

What are the risks of manual payroll processes?

Manual spreadsheets are risky, especially given complex rules such as those for property or accommodation benefits and specific group employee benefits insurance. Relying on disconnected, unautomated or out-of-date systems will often lead to untraceable data discrepancies and frequent human errors.

How does software improve accuracy?

Modern payroll software automates complex workflows. It ensures that whether a staff member is based in London, or Manchester, or working remotely, their pay is accurate, instantly addressing regional differences like Scottish Income Tax rates, or London allowance weightings.

As UK legislation states, accurate record-keeping is a legal requirement. A robust HR and payroll solution will update automatically when legislation changes, removing the tracking burden. Furthermore, integrating your accounting software will ensure your financial reporting is always real-time, and therefore provides a clear and instant view of labour costs.

Want to experience the future of payroll?

Book a demo