As an employer, whenever you pay a certain amount to your employee after working out the taxes, the payment might get smaller. If you want to provide a net payment to your employee without any tax deductions, you can go for a tax gross up. Read on to find out the details.
What is a Gross-Up?
It is the additional money that the employer adds to the net pay of an employee to pay the tax amount that is owed to him. The practice of grossing up is often seen in executive compensations plan. Like, a company may agree to pay executives a tax gross up to offset the income tax.
Generally, the tax gross up is for special payments like bonuses or relocation payment.
How to do Tax Gross up?
You can follow these simple steps to gross up a payment:
- Include all the taxes that apply to the employee’s salary/pay. It can be income tax and other taxes.
- You can do it easily by turning the total tax rate into decimals. You can do it by dividing the percentage by 100. For instance, if the total percentage of taxes is 30%, you’d get the decimal 0.35 after dividing it by 100.
- After getting the decimal number of your tax, you need to subtract it from 1. By doing this, you’d get the net percent. As total taxes are equal to the net percent.
- Then, you need to divide the net pay by the net percentage. It will provide you with the gross amount that you want to pay to your employee as the grossed up payment.
Net Salary/ Net Percent= Gross Salary
Suppose you are willing to give an employee a bonus of £300 (without deducting taxes) whose income is £12,500.
1. Bonuses are taxable in the UK. The HMRC tax rate for basic rate taxpayers above 12,570 (2021-22 exceeding the standard personal allowance) is 20% and NI at the rate of 12%.
You need to add all the tax rates that your employee owes.
20% + 12% = 32%
2. Change the tax rate into a decimal value by dividing it by 100. So, 32% will be 0.32.
Deduct the decimal value of the tax rates from 1.
1- 0.32 = 0.68
3. Now, take the net bonus payment that you want to pay and divide it with the result you get after deducting the decimal amount with one (step two).
300 / 0.68 = 441.17
To sum up, you are required to pay £441.17 to the employee to pay him a net bonus of £300.
After the tax gross up, you still might not cover all the taxes. HMRC has a progressive tax rate, the more an employee earns, the more tax rate he’d be charged. Due to the progressive rate, you might use a little amount as a gross up. You need to remember that the gross up pay might increase the taxes. In this scenario, you might not pay additional taxes, which may reduce your promised tax rate. As a result, your employee has to pay more taxes.
In such cases, you also need to consider the voluntary tax deductions, especially when grossing up on a regular basis. These deductions include withholding for retirement plan or health insurance.
Quick Wrap Up:
Before doing a Tax gross up, you need to critically examine whether you can afford the gross up, you’re paying against your employees’ income. This calculation can be complex for a person who lacks an accounting or finance degree and specializations.
Therefore, we strongly recommend you consult an accountant to properly managing your gross-up for the payroll.
Cheap accountants in London have a team of qualified accountants, who’ll provide you with a tailored consultation and help regarding the gross up payments.
Feel free to contact us and let us know your need!
Disclaimer: This blog is just for a basic understanding of the topic.