5. How is an employee’s net pay calculated? Employees can be paid directly by transferring money electronically into their bank account, in cash or sometimes by cheque. Most people do not get the gross pay that they earn. Instead they have to pay tax on it first. Net pay is the income left over after all statutory and voluntary deductions have been taken from gross pay.
Tax Credits Before showing how net pay is calculated, you need to know about tax credits. A tax credit is an allowance that reduces the amount of tax owed.
You are entitled to tax credits depending on your personal circumstances. The tax credits available to employees include: PAYE credit Single Person Child Carer credit Personal tax credit Home Carer credit Dependent Relative credit Rent credit
¶ ¶ ¶ ¶ ¶ ¶
The more tax credits you are eligible for, the less tax you pay.
Example: Deducting tax credits Sue earned €2,000 in Gross Pay last month. She pays tax at 20% and is entitled to tax credits worth €150. Sue’s pay can be calculated as follows:
Gross Pay
PAYE tax (20% of €2000) Less Tax Credits
Total tax to be deducted Net Pay
€2,000 €400
€150 €250
€1,750
Calculating Net Pay There are four stages in calculating net pay: Step 1 Calculate Gross Pay Step 2 Deduct PAYE (minus tax credits) Step 3 Deduct Universal Social Charge Step 4 Deduct PRSI Step 5 Deduct any Voluntary Deductions
