Understanding your payslip

Most people look at the net figure and nothing else, which means payroll errors persist for months or years and unclaimed entitlements go unclaimed.

What is on it

Terminology varies by country, and the structure is consistent.

Gross pay: total earnings before deductions, including basic pay, overtime, bonuses, commission and any allowances.

Statutory deductions: income tax and social security or national insurance contributions, calculated according to your tax code or equivalent.

Voluntary deductions: pension contributions, salary sacrifice arrangements, union dues, share schemes, season ticket loans, charitable giving and similar.

Employer contributions, which are shown on many payslips and which are part of your total compensation even though they do not appear in your net pay.

Net pay: what actually arrives.

And year-to-date figures, which are worth checking against your own records.

The tax code

The item that most commonly goes wrong.

Systems differ, and in most cases a code or equivalent determines how much tax-free income you receive and at what rate the rest is taxed.

It goes wrong after: starting a new job, having more than one job, changing from part-time to full-time, receiving benefits in kind, a change in circumstances, or an error by the tax authority.

Emergency and temporary codes typically deduct too much.

Overpayments are refundable, and refunds require you to notice.

Underpayments are collected later, frequently in an unwelcome lump.

Checking the code against what the tax authority holds, and against your circumstances, takes minutes.

What to check every month

Briefly.

That the hours or salary are correct, including overtime and any additional shifts.

That the tax code has not changed unexpectedly.

That the pension contribution rate is what you agreed.

That no deduction has appeared that you did not authorise.

That any expenses reimbursement has come through.

And that year-to-date figures are consistent with previous months.

Pension contributions

The most valuable line and the most ignored.

Where an employer matches contributions, contributing at least enough to obtain the full match is generally the highest-return action available in personal finance — declining it is declining part of your salary.

Contributions typically receive tax relief, which means the cost to your net pay is less than the amount going into the pension.

Salary sacrifice arrangements, where available, can reduce social contributions as well, increasing the effect — with implications for other calculations that are worth understanding.

Automatic enrolment schemes exist in several countries with minimum contribution rates that are generally insufficient for an adequate retirement.

And opting out is almost always a mistake unless there is severe short-term hardship.

Benefits in kind

Which are taxable in most jurisdictions.

Company cars, private medical insurance, gym memberships, interest-free loans above a threshold and similar are generally taxed, frequently through an adjustment to the tax code.

Which means the benefit costs you something, and understanding how much determines whether it is worth taking.

Some benefits are tax-advantaged — pension contributions, cycle schemes, childcare arrangements in some countries — and are worth using.

Common payroll errors

Which do occur.

Incorrect hours or overtime rates.

Missing shift premiums.

Incorrect holiday pay, which in several jurisdictions must include regular overtime and commission and frequently does not.

Deductions continuing after an arrangement has ended.

Incorrect statutory payments for sickness, maternity or paternity.

Being paid below the applicable minimum wage once unpaid working time is counted, which is a widespread and enforceable problem.

And errors following a change in circumstances, which is when most occur.

Raising a problem

Practically.

Raise it in writing with payroll promptly, since errors compound.

Keep copies of payslips and contracts.

If an employer has underpaid, most jurisdictions have a route to enforce payment through employment tribunals or labour authorities.

If an overpayment has been made to you, employers can generally recover it, and the arrangements for doing so are negotiable.

Unions and employment advice services help with both.

The annual documents

Worth keeping.

End-of-year summaries of pay and tax, which are required for tax returns, loan applications and benefit claims.

Pension statements.

P60, W-2 or the local equivalent.

Keep them for the period your jurisdiction requires, which is generally several years.

And check them against your payslips, since annual documents are compiled from the same system that produced any error.

General information only, not financial or tax advice. Systems vary by country — consult a qualified accountant, union or tax authority about your own circumstances.