What is Gross Income and How Does It Work?
What is gross income?
Simply put, gross income is the amount of money stated on your paycheque before any deductions. Yes, that is your income before any tax or pension deductions.
How to Calculate Gross Income
Not sure what your gross income is? Not to worry! Here is a simple guide:
In general, if you are paid by the hour, you would need to multiply the number of hours worked by the wage rate. For example, you work 40 hours in a week (excluding overtime), and earn £8.72 (Oct 2020 - minimum wage 25+), you would earn £348.80 weekly.
40 x £8.72 = £348.80
Thus, £348.80 is your weekly gross income.
Depending on whether your employee pays overtime hours at the same rate, the formula works the same way. The number of hours of overtime multiplied by the wage rate. Add your regular working hours and the overtime hours to get your weekly gross income.
In order to calculate gross income based on salary wages, you would need to determine the number of pay periods there are in a year. For example, if you are paid weekly, there would be a total of 52 pay periods in a year. If your annual income is £24,000, you would need to divide this by the number of pay periods in a year. If you are paid monthly (12 pay periods), you would need to divide £24,000 by 12.
£24,000 ÷ 12 = £2,000
Therefore, your gross income would be £2,000 monthly.
If you are paid extra for anything e.g. overtime or given a bonus by your employer during a period, add that to the gross income calculated beforehand to determine full gross income for that period.
For example, your annual income is £24,000 and you are paid monthly and determine that your gross income is £2,000. You earned a bonus of £2,000 in the last month. To find your full gross income for that month, you would need to sum up the bonus and gross income determined beforehand.
£2,000 + £2,000 = £4,000
Therefore, your full gross income would be £4,000 for that period.
Often people have multiple bank accounts to separate savings, to have multiple savings goals or to receive multiple perks. However, sometimes people do not keep track of their expenditure and cannot see the bigger picture without having all the data collated in one place.
What does gross income in a business refer to?
Gross income in business is a measure of a company or organisations’ profitability. Gross income in a business can be equated to gross profit. It is the gross revenue of the company minus direct costs. This means the measure of gross income takes into account direct costs but neglects all other costs incurred by the company or organisation.
A simple equation to represent gross income would be as follows:
Gross Income = Gross Revenue - Direct Costs
What are Direct Costs?
These costs are directly involved in production or manufacturing of a good or service. For example, direct labour or direct materials can be measured as direct costs. At Costa, the coffee beans used are a direct cost for the company. The baristas are a measure of direct labour, making it a direct cost. However, the staff at Costa HQ do not represent direct cost as they are not directly involved in production of the goods or service.
Gross Income vs. Net Income
Taxable Income vs. Gross Income Example
Taxable income is simply defined as income that is applicable for tax. Taxable income is the portion of your gross income that is subject to tax. This form of tax is known as Income Tax. For more information read our Income Tax article.
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