The difference between gross and net salary usually causes confusion. Though both have to do with our pay, they’re not the same.

Gross salary is the total amount a company pays an employee. Nonetheless, the employee doesn’t receive that amount in their bank account every month. Gross salary includes social contributions as well as taxes that employees have to pay — in Spain, they pay Impuesto sobre la Renta de las Personas Físicas (IRPF); in the US, it’s a federal tax that the Inland Revenue Service (IRS) collects; and in the UK, it's known as Income Tax. 

Gross salary might also include private health insurance, special allowances, restaurant vouchers, company car and other monetary or in-kind employee benefits. It’s the total remuneration that employees receive before tax, social contributions and other deductions.

Net salary is the amount employees receive into their bank account every month after deductions. Checking the breakdown on your payslip helps learn the difference. The highest figure is the gross salary and the lowest, the net salary.

Why should we know the difference?

Recognising how gross and net salary differ helps people avoid any misunderstanding when taking a new job.  Knowing how much money we have each month is also key to maintaining good financial health. It helps us draw up a budget and to know whether we can apply for a loan, mortgage and banking products and services.

When weighing up whether to change job or negotiate a pay rise, we can use gross salary to calculate how much tax we will have to pay. In Spain, the more a person earns, the more income tax they owe.

Gross salary is also the basis for calculating severance pay and government benefits. That’s why we should make sure our payslips show the gross salary, deductions and the net salary we’ll receive in our bank account correctly.