In London and the South East, some employers often make the mistake of negotiating net rates instead of gross rates, which can lead to significant differences in pay. Gross Pay refers to the amount before deductions, while Net Pay is the amount the employee receives after deductions. Historically, net pay rates have been unfair to employees, and with the introduction of pensions, maintaining a net rate has become impractical for both employees and employers. Negotiating net pay can lead to various issues as the tax, national insurance, and pension contributions may fluctuate, making it challenging to predict the actual costs.
Advantages of agreeing on a gross pay for the employer:
- Fixed Costs: By agreeing on a gross pay from the outset, the employer avoids unexpected HMRC bills for additional taxes.
- Pension Contributions: Employers can deduct the employee's pension contribution from the employee's pay. If the employee wishes to contribute more to the pension, they can do so without increasing the employer's costs.
- Other Deductions: With a gross salary, any additional deductions like Student Loan or Court Orders are paid for by the employee, not the employer.
Advantages of agreeing on a gross pay for the employee:
- Tax Refunds: Under a gross pay agreement, any tax refunds go directly to the employee, not the employer.
- Variable Tax: If the tax due decreases due to a period with less or no income, the employee benefits from a higher net pay.
- Tax Reductions: The employee benefits from any tax reductions announced by the Chancellor each year.
- Increased Pension Savings: Employees can choose to save more than the statutory minimum for retirement.
If you decide to offer a gross pay rate but your employee requests a net amount, you can determine the equivalent gross pay with the help of ThePayTeam. They can calculate the gross pay based on the current tax and NI rates, the employee's taxpayer status, and the expected net pay.
IMPORTANT: If you have already offered a net rate, you may not be able to retract the offer and change it to a gross rate. Offering both net and gross rates in the written contract would create conflicting agreements and is not permissible. Therefore, it's essential to agree on one type of pay rate during negotiations.
If you would like any further help or information on this subject contact the payroll team.
