Gross vs. Net Income: Which Number Your Budget Should Start From

Gross vs net income comes down to two lines on a payslip: what you earned and what you actually receive. Gross income is your pay before taxes and other deductions are taken out.¹ Net income, also called take-home pay, is what reaches your account after them, and the US Consumer Financial Protection Bureau (CFPB) tells people to make their budget from net income.²

Business accounting uses the same words for revenue and profit. This guide is about pay: the two figures on a payslip or pay stub, and which one each money decision should use. If your latest payslip is to hand, find both numbers on it now.

Gross vs net income: two numbers, one paycheck

Gross pay is everything you earn for a period before deductions, and net pay is the amount left once taxes, social insurance and other deductions have come off.

The two numbers drift apart because deductions are taken before you are paid. Under the UK’s PAYE system, for instance, employers take income tax and National Insurance before they pay wages, so that money never passes through your hands.³ A salary turns into a smaller monthly deposit, and the difference is easy to forget when you picture what you can afford. Whenever someone quotes a pay figure, yours included, ask whether it is gross or net.

How big is the gap? Income tax and employee social security contributions took about a quarter of a single average earner’s gross pay across OECD countries in 2025, according to the OECD’s Taxing Wages 2026 report. The share varies widely between countries.⁴

The study

Strong evidence

A single average earner, modelled across 38 OECD countries in Taxing Wages 2026

For a single worker without children earning the average full-time wage, income tax plus employee social security contributions, minus cash benefits, came to 25.1% of gross earnings on average across OECD countries in 2025, leaving 74.9% as after-tax income. Belgium had the highest rate and Colombia the lowest, at zero: there an average earner paid no income tax, and pension and health payments are not counted as taxes.⁴

These are model calculations for one type of household, not real payslips. They cover taxes and social security contributions only, so they leave out compulsory payments the OECD does not class as taxes and anything else taken from pay, such as extra pension saving.⁴ A rule of thumb borrowed from another country’s payslip, or from a friend’s, can be far off for yours.

What comes out between gross and net

Three kinds of deduction usually separate gross from net: income tax, social insurance, and money taken for pensions, benefits or loans. Each country sets its own list and rates, so the US and UK rules below are examples; elsewhere, check your national tax authority.

Some deductions come off before tax is worked out, which changes the arithmetic. In the US, salary deferrals into a 401(k)401(k): A US workplace retirement plan in which employees save part of their pay, often with a matching contribution from the employer and tax advantages. Contribution limits, vesting of the employer's money and plan terms are set by US rules and each plan's documents.Full entry in the glossary plan are excluded from taxable income, except for Roth deferrals.⁵ Money you put through a cafeteria plan for qualified benefits, such as health cover, is not counted as wages for federal income tax and generally escapes Social Security and Medicare tax too.⁶ In the UK, some workplace schemes take pension contributions out of pay before income tax, while others have the provider claim basic-rate relief and add it to your pot.⁷

A deduction taken before tax lowers your take-home pay by less than its size. If 100 a month goes into a pension before income tax at a 20 percent rate, and nothing else changes, net pay falls by about 80, because the tax line shrinks too.

1. Gross pay: everything earned before deductions; the figure US lending ratios such as 28/36 use
2. Income tax: taken through PAYE in the UK and federal withholding set by Form W-4 in the US
3. Social insurance: National Insurance in the UK, Social Security and Medicare (FICA) in the US
4. Pension and benefits: some are taken out before tax, which lowers the tax line
5. Other deductions: such as UK student loan repayments, depending on where you live and work
6. Net pay: what reaches your account, and the number a budget starts from

Your own payslip is the only reliable map of your deductions; the table tells you what to look for on it.

Finding the two numbers on your payslip

On most payslips gross pay sits near the top with your earnings, and net pay sits at the bottom, after the list of deductions. Whether you are entitled to a payslip at all depends on where you work: the UK requires one for employees, while the US federal Fair Labor Standards Act has no pay-stub requirement.

GOV.UK’s guidance for UK employees says an employer must give them a payslip on or before payday, showing earnings before and after deductions, the amount of any deductions that can change from one payment to the next, such as tax and National Insurance, and hours worked if pay depends on them.¹³ The US Department of Labor, by contrast, notes that the Fair Labor Standards Act requires employers to keep accurate records of hours and wages but does not require them to give employees pay stubs.¹⁴ US states can set their own rules; elsewhere, your labor ministry or tax authority sets them.

Read a payslip line by line at least once, and again after a new job, a raise, a new tax year or a new benefit. Check that the net figure matches the deposit in your bank account, because that deposit, not the salary in your contract, is what your budget can spend.

Check on your next payslip

• Gross pay for the period, including any overtime or bonus
• Income tax and social insurance lines
• Pension and benefit deductions, and whether they come off before tax
• Loan repayments or other deductions you recognize
• Net pay, matched against what reached your bank account
• Tax code (UK) or withholding (US) unchanged, unless you expected a change

Should you budget with gross or net income?

Budget with net income. The CFPB’s 2022 teaching guide says a budget should be made using net income, the money you bring home after taxes and other deductions, and its version of the 50/30/20 rule splits net income, not gross, into needs, wants and savings, while warning that the split will not fit everyone.²

The reason is mechanical. A budget hands out money to rent, food, bills and savings, so it has to start from money that arrives. Plan from gross and part of the plan spends money that went to tax before payday, which later shows up as a shortfall nobody can trace.

Myth

A budget built on your salary is a safe starting point.

Fact

Your spending money is net pay, what is left after tax and deductions. Plan from that, and use gross only where a rule asks for it.

Savings taken from pay, such as pension contributions, are already happening. List them in your savings line if you want the whole picture, but never as money available to spend. Turning net pay into a full plan is a separate job, set out in building a monthly budget from your take-home pay.

How to calculate net income from your gross salary

To estimate net income, start with gross pay for one pay period, then take off each deduction your country applies, in the order it applies them: pre-tax deductions, income tax, social insurance, and anything taken after tax. Your payslip does this for you; the arithmetic lets you check it and see what a raise will add.

That order applies as follows to one illustrative UK salary of £36,000 a year, for an employee in England with the standard Personal Allowance, National Insurance category A, a Plan 2 student loan and no pension deduction, at the rates for the 2026 to 2027 tax year:

A real payslip can differ by a few pounds because of tax codes and HMRC’s rounding, but the shape holds: a fifth of this salary never reaches the account.

The example also shows what a raise is worth: in that band, income tax, National Insurance and the student loan all take their share of each extra pound, so a raise of £100 a month adds only about £63 to take-home pay. When you negotiate pay or compare two offers, convert both to the same basis first: a gross figure from one employer and a net figure from another cannot be compared until you do.

In the US, the fixed part is the Social Security and Medicare tax in the first table. Federal income tax withholding depends on the Form W-4 you file, and the IRS’s free Tax Withholding Estimator works out the right amount and can produce a completed form to give your employer.¹⁵ Then subtract any other taxes and deductions that apply where you live and work.

When the gross figure is the one that counts

Gross income still matters wherever someone else measures your earnings. Lenders, some loan-repayment rules, pension limits and pay talks can all work from gross rather than from what you take home.

Lenders are the clearest case. The CFPB explains that a debt-to-income ratio adds up your monthly debt payments and divides them by your gross monthly income, and that different loan products and lenders set different limits.¹ A common US guideline, the 28/36 rule, suggests spending no more than 28 percent of gross monthly income on housing and no more than 36 percent on all debt; Bankrate notes that it is a guideline rather than a law, and that many lenders allow higher ratios on conventional loans.¹⁶

Because the ratio uses gross, a payment that passes the test takes a bigger bite out of take-home pay. On an illustrative US$6,000 a month gross, a housing payment at the 28 percent limit would take about 37 percent of a US$4,500 take-home pay. Before you agree to a loan sized on gross, check the payment against your net budget.

Some deductions rise with gross pay too. UK student loan repayments are worked out on income before tax, including bonuses and overtime, so a pay rise lifts the repayment along with the salary.¹² UK pension tax relief is limited by your annual earnings, not by what you take home.⁷

Self-employed or paid unevenly: build your own net

If you are self-employed, usually nobody deducts tax before you are paid, so the money clients pay you is closer to gross than to net. Your own net figure is what remains after business costs and the tax and social insurance you will owe on your profit.

In the US, self-employment tax covers Social Security and Medicare at 15.3 percent of net earnings from self-employment: 12.4 percent for Social Security, up to a yearly earnings cap, and 2.9 percent for Medicare.¹⁷ On wages, employee and employer split that same total between them, so the self-employed pay both halves.⁸ In the UK, profits above £12,570 a year carry Class 4 National Insurance of 6 percent in the main band and 2 percent above it, for the 2026 to 2027 tax year, which most people pay through Self Assessment.¹⁸

The habit that follows is to move a share of every payment into a separate pot for tax before you count any of it as spendable. The rest of the method, from planning around a lean month to building a buffer, is in the guide to budgeting when your income is irregular.

When your take-home pay looks wrong

If net pay drops for no reason you know, or a deduction appears that you do not recognize, ask your employer’s payroll team first. GOV.UK warns UK employees that a wrong tax figure on a payslip can mean a wrong tax code, and it links to steps for checking it.¹³

• Now: raise an unexplained drop or an unfamiliar deduction with payroll before the next pay date, and keep your payslips as a record.
• Soon: in the US, the IRS suggests completing a new withholding form each year and whenever your personal or financial situation changes.⁹
• Routine: choices with tax effects, such as how much to pay into a pension or whether to join a pre-tax benefit plan, depend on your circumstances. A qualified, regulated financial adviser or tax professional can help, and your national tax authority publishes the rules for your country.

The bottom line

Plan your month from net pay, the amount that reaches your account, and keep gross for the places that ask for it: loan ratios, student loan thresholds, pension limits and pay offers. Read one payslip line by line so you know what sits between the two numbers. If you work for yourself, build your own net by setting tax aside before you count anything as spendable.