What is net pay and how is it worked out?
Net pay is gross pay minus every deduction, and for an employee on the standard tax code it is shaped by an 8% National Insurance rate on earnings between £12,570 and £50,270 and a £12,570 tax-free personal allowance [2][4]. It is the figure that actually reaches the employee's bank account, often called take-home pay, and it is always lower than the headline salary [1].
The gap between gross and net is not a single tax. It is a stack of separate deductions, each with its own rule: income tax through PAYE, National Insurance, workplace pension contributions and, where relevant, student loan repayments [1]. Understanding net pay means understanding what each of those deductions takes, and in what order.
This guide is written for employers and payroll administrators who need to explain net pay accurately, and it walks through the definition, the four main deductions, a worked example, and a common source of confusion: the phrase "net pay arrangement", which means something entirely different from take-home net pay.
Key takeaways
- Net pay is gross pay minus all deductions, the amount the employee actually receives [1].
- The four main deductions are income tax, National Insurance, pension contributions and student loan repayments [1].
- Employee National Insurance is 8% on earnings between £12,570 and £50,270, and 2% above that, for the 2026-27 tax year [4].
- The law requires every payslip to show both gross pay and net pay separately [10].
- "Net pay arrangement" is a pension tax-relief method, not the same thing as take-home net pay [9].
What net pay means
Net pay is the result of a single subtraction: gross pay less every authorised deduction [1]. Gross pay is the full amount an employee earns before anything is taken off, including basic salary plus any overtime, bonus or commission [10]. Net pay is what is left once tax, National Insurance and any other deductions have been removed.
The formula is consistent regardless of how much someone earns. Net pay equals gross pay minus income tax, minus National Insurance, minus pension contributions, minus student loan repayments, minus any other authorised deduction [1]. Because the deductions scale with earnings, two employees on the same gross salary can still receive different net pay if their tax codes, pension choices or loan plans differ [5].
For an employer, net pay is the figure that determines the actual bank transfer, while gross pay drives the cost of employment and the figures reported to HMRC [13]. Any business running HMRC-recognised payroll software for SMEs calculates net pay automatically from the gross figure and the employee's deduction settings.
The deductions that turn gross into net
Four deductions account for almost every gap between gross and net pay. The table below sets out what each one is and the basis on which it is taken for the 2026-27 tax year.
| Deduction | What it is | 2026-27 basis |
|---|---|---|
| Income tax | PAYE tax on earnings above the personal allowance | 20%, 40% or 45% by band, £12,570 allowance on code 1257L [[2]](https://www.gov.uk/income-tax-rates) |
| National Insurance | Employee Class 1 contributions | 8% from £12,570 to £50,270, 2% above [[4]](https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027) |
| Pension | Workplace pension under auto-enrolment | Minimum 8% of qualifying earnings, at least 3% from the employer [[8]](https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay) |
| Student loan | Repayment once earnings pass the plan threshold | 9% of earnings above the plan threshold [[6]](https://www.gov.uk/repaying-your-student-loan) |
Income tax through PAYE
Income tax is usually the largest deduction. It is collected through PAYE, the system by which the employer deducts tax each payday based on the employee's tax code [13]. The standard code for the 2026-27 tax year is 1257L, which gives a tax-free personal allowance of £12,570 spread across the year [5].
Tax is then charged on earnings above the allowance at 20% up to £50,270, 40% up to £125,140, and 45% above that for employees in England and Northern Ireland [2]. Scottish and Welsh taxpayers have their own code prefixes and, in Scotland, their own bands, which is why two employees with identical pay can see different tax depending on where they are taxed [5].
National Insurance
National Insurance is the second deduction, and for most employees it is charged at 8% on earnings between the Primary Threshold of £12,570 and the Upper Earnings Limit of £50,270 a year [4]. Earnings above the Upper Earnings Limit attract a reduced 2% rate [3].
The contributions fund entitlement to the State Pension and certain benefits, which is why National Insurance is a separate deduction from income tax despite both being based on earnings [3][15]. The employer also pays its own National Insurance on top, but that is an employer cost and does not reduce the employee's net pay [4].
Pension contributions
Where an employee is automatically enrolled in a workplace pension, their contribution is deducted from pay and appears on the payslip [8][11]. The auto-enrolment minimum is a total contribution of 8% of qualifying earnings, of which at least 3% must come from the employer, leaving 5% from the employee including tax relief [8].
Qualifying earnings are the band between £6,240 and £50,270 a year, so the percentage applies only to earnings inside that band rather than the whole salary [8]. The mechanics of auto-enrolment explained in full sit in a separate guide, but for net pay the point is simple: the employee's pension contribution reduces take-home pay while building retirement savings.
Student loan repayments
For employees repaying a student loan, the deduction starts once earnings pass the plan threshold and runs at 9% of the earnings above it, not on the whole salary [6]. The threshold depends on the plan: Plan 1 sits at £26,900, Plan 2 at £29,385 and Plan 4 at £33,795 for the 2026-27 tax year [7][14].
The deduction is calculated each pay period on that period's earnings, so it rises and falls with variable pay [7]. The detail of how the bands work is covered in a dedicated guide to student loan deductions explained, but for net pay it is another slice taken from gross before the employee is paid.
A worked example
A worked example shows how the deductions stack. Take an employee on a £36,000 annual salary, paid £3,000 a month, on tax code 1257L, repaying a Plan 2 student loan and contributing 5% of qualifying earnings to a workplace pension. The figures below are illustrative and rounded for clarity.
| Line | Monthly amount |
|---|---|
| Gross pay | £3,000.00 |
| Income tax (20% above the monthly allowance) | £390.40 |
| National Insurance (8% above the monthly threshold) | £156.16 |
| Pension contribution (5% of qualifying earnings) | £124.00 |
| Student loan (Plan 2, 9% above the threshold) | £49.00 |
| **Net pay** | **£2,280.44** |
The example illustrates the order of thinking rather than a precise payroll run, because the exact tax depends on the cumulative position across the year and on whether the pension uses a net pay arrangement or relief at source [9]. The headline point holds: a £3,000 gross month becomes roughly £2,280 in the bank once the four deductions are applied. An employer issuing a one-off HMRC-compliant payslip runs the same subtraction for a single payment.
Net pay versus the "net pay arrangement"
One phrase causes more confusion than any other in this area. "Net pay" as take-home pay is not the same as a "net pay arrangement", which is a method of giving pension tax relief [9]. The two share a name and nothing else.
Under a net pay arrangement, the pension contribution is deducted from gross pay before income tax is calculated, so the employee gets full tax relief immediately through payroll [9]. Under the alternative, relief at source, the contribution is taken after tax and the pension scheme reclaims basic-rate relief from HMRC [12]. The table below contrasts the two.
| Feature | Net pay arrangement | Relief at source |
|---|---|---|
| When the pension is deducted | Before income tax [[9]](https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief) | After income tax [[12]](https://www.thepensionsregulator.gov.uk/en/employers/new-employers/im-an-employer-who-has-to-provide-a-pension/choose-a-pension-scheme/what-to-look-for-in-a-pension-scheme) |
| Higher-rate relief | Given automatically through payroll [[9]](https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief) | Extra relief claimed via a tax return [[12]](https://www.thepensionsregulator.gov.uk/en/employers/new-employers/im-an-employer-who-has-to-provide-a-pension/choose-a-pension-scheme/what-to-look-for-in-a-pension-scheme) |
The reason this matters for net pay is that the choice of arrangement changes the order of the deductions, and therefore the exact tax figure, even when the gross salary and pension percentage are identical [9]. Accountants managing this across multiple client schemes typically rely on a multi-client payroll dashboard that applies the correct method per scheme.
Net pay on the payslip
Net pay is not just a calculation, it is a legal requirement on the payslip. Under the Employment Rights Act 1996, every worker is entitled to an itemised pay statement that shows gross pay, net pay and the deductions in between [10]. Variable deductions such as tax and National Insurance must be shown individually with what they are for [10].
The payslip must be provided at or before the time wages are paid, whether on paper or electronically [10]. Where pay varies by the hours worked, the payslip must also show the number of hours [10]. Software that holds the HMRC Recognised badge produces a compliant payslip showing both figures, and a platform embedding payroll through an HMRC-recognised payroll API returns the same gross and net breakdown for the host product to display.
Conclusion
Net pay is a simple idea built on a stack of separate rules. It is gross pay minus income tax, National Insurance, pension and student loan, and the size of each slice depends on the employee's earnings, tax code, pension choice and loan plan. The arithmetic is always the same subtraction, but the inputs vary enough that no two employees on the same salary are guaranteed the same take-home figure.
The most common trap is the language itself: a net pay arrangement is a pension mechanism, not take-home pay, and conflating the two leads to errors in both the tax calculation and the conversation with employees. As payroll moves further towards real-time calculation and embedded delivery, the gross-to-net engine increasingly sits inside other software rather than a standalone tool, but the underlying subtraction, and the duty to show both figures on the payslip, stays exactly the same.
Frequently asked questions
What is the difference between gross pay and net pay?
Gross pay is the full amount an employee earns before any deductions, including basic salary plus any overtime, bonus or commission [10]. Net pay is what remains after income tax, National Insurance, pension contributions and any student loan repayment have been deducted, and it is the amount that actually reaches the employee's bank account [1]. Net pay is always lower than gross pay.
How is net pay calculated?
Net pay is calculated by subtracting every authorised deduction from gross pay [1]. The main deductions are income tax through PAYE based on the tax code, National Insurance at 8% on earnings between £12,570 and £50,270, any workplace pension contribution, and a student loan repayment where earnings exceed the plan threshold [4]. The remainder is the net, or take-home, figure.
Is net pay the same as a net pay arrangement?
No. Net pay is take-home pay, the amount left after deductions [1]. A net pay arrangement is a method of giving pension tax relief, where the pension contribution is taken from gross pay before income tax is worked out [9]. The two share a name but describe different things, and confusing them leads to errors in the tax calculation.
Does net pay have to appear on a payslip?
Yes. Under the Employment Rights Act 1996, every payslip must show both gross pay and net pay, along with the deductions in between [10]. Variable deductions such as income tax and National Insurance must be itemised individually [10]. The payslip must be provided on or before payday, and may be issued electronically.
