Understanding Your Payslip and How Your Salary is Calculated
Opening your payslip can come with a real mixed bag of emotions. The first thing all of us do is seek out the big bolded number on the bottom to see what our take-home pay is. And all too often, it can go a little something like this:
“Yes! I’ve been paid! Wait a minute, that’s not the amount I was expecting… they’ve taken how much for tax? And what’s that other deduction for? Surely that can’t be right… what does that code mean?”
That little slip of paper (or PDF, it’s the 21st century after all) can be really confusing to decipher. But generally, as long as they’ve got your hours right, you’ll file it away and forget about it, because you’re sure the boss has got you covered. Right?
Whilst we’re pretty sure your employer’s finance department know what they’re doing, it can’t hurt for you to be able to interpret those tiny hieroglyphics inscribed on your payslip, or for you to be 100% sure that you’re being paid the right amount. So, in an effort to help you understand this confusing yet vital piece of paper, we have created this go-to guide. We hope it helps you feel a whole lot more confident next payday.
What is a payslip?
A payslip, also referred to as a wage slip, is a document issued by your employer that lists details about your pay before tax, as well as any deductions.
Your payslip itemizes the income you earned over the pay period and year-to-date payroll. It should also show taxes and any other deductions that have been taken out of your earnings. Finally, it should show the amount you actually receive (aka your net pay).
Your payslips also serves as a proof of income or employment, which is more often than not required when applying for a loan or form of credit. By reviewing your payslip regularly, you can make sure you’ve been paid correctly and better understand your deductions. There are many details included on a pay stub to help you and your employee keep track of payments and deductions.
Generally, the items on a payslip can be broken down into three parts:
- Basic pay
- Taxes, deductions and contributions
- Net pay
To understand what information is included in a payslip, take a look at each category we’ve detailed below.
Is my employer legally obligated to provide a payslip?
Yes! The Payment of Wages Act 1991 grants all employees the right to a payslip.
And as of April 2019, The Employment Rights Act 1996 (Itemised Pay Statement) (Amendment) Order 2018 came into effect, which stipulates that your employer is now required to list details on the number of hours being paid out on your payslip.
There are some exceptions: Anyone who isn’t classified as an employee, for example, contractors and freelancers, are not entitled to receive a payslip.
When should I receive my payslips?
Payslip law also states that your employer must make your payslip available to you either on or before the day you’re getting paid. This will vary depending on the type of business you work for – some paydays will fall on the same day every month, while others pay every four weeks.
What are the key details I should expect to find on my payslip?
By law, UK payslips must contain the following information:
- The total amount you’ve been paid before compulsory deductions have been made (your gross pay).
- The amounts of variable deductions taken from your gross pay, and what these deductions are for. These include things like tax and National Insurance (NI).
- The total amount of any fixed deductions taken from your gross pay. These don’t change from payday to payday, for example union fees.
- The total amount of pay you take home after deductions (your net pay).
- The amount and method for payments. If your employer has paid you part cash, and part bank transfer, for example, that has to be made clear on your payslip.
Am I entitled to ask for a paper payslip?
Employers can choose whether they provide hard copy or digital payslips.
How long should I keep hold of my payslips?
While technically payslips only need to be kept until you’ve been issued your P45/P60, HMRC (Her Majesty’s Revenue and Customs, in case you’re interested) advises all employees to hang onto their payslips for as long as they possibly can.
At minimum, you should keep your records for at least 22 months after the end of the tax year the tax return is for. It’s also advisable to keep a record of payslips that show proof of pension contributions. Payslips are well worth holding onto for a few reasons – you never know when you might need them for a rent or mortgage application or to resolve pay queries down the line.
What’s the Pay As You Earn (PAYE) system?
The UK operates on a Pay As You Earn (PAYE) system, which is essentially a method of paying tax and National Insurance (NI) contributions during the year.
In essence, your employer withholds taxes due from you from your pay or pension before paying you your wages. At the end of the tax year, you will receive a form, known as a P60, which outlines out the total amount you were paid for the previous tax year along with any deductions.
How to read your payslip
If you, like many workers today, have your payslip deposited electronically, it may have been a while since you actually gave it more than a cursory glance. And if you have checked it out recently, did you really understand everything on it?
The below is a basic, UK payslip. It’s been numbered to help you recognise and understand the different things written on it, and each number corresponds to an explanation below.