Are you an owner of a business? You will have to hire employees for the sake of meeting certain targets of your company. And there are times that a certain amount in form of salary has to be offered to your employees. However, the tax factor comes in the way and the amount of salary gets smaller after the tax deductions. This makes most of you wonder what are possible ways to provide a certain net amount of salary to your employees. Tax gross-up is all that you need to sort out this problem.
Now you need to know everything about tax gross-up before you plan to implement it. Well, we have got you covered here in form of this comprehensive guide. As you will gather information from the basic to relevant details. This involves the discussion of what is tax gross-up, when is the right time to implement tax gross-up, what is the procedure to do it and what other calculations are to be considered along with this procedure.
Reach out to our smart and clever-minded guys to get your tax gross-up queries answered quickly. We will help to decide how to deal with your tax implications.
What is a Tax Gross-Up?
Gross up refers to the amount that is additional and added to payment before it goes to the employee. The purpose of this additional amount is to cover the income tax deductions that the recipient owes on the receiving amount. The executive compensation plan is the activity where the gross-up amount is added more than any other payments. We can take the example of an employer who has promised a certain figure of salary to the employee.
Now when the time comes to transfer the amount of salary, the gross amount will be added over the promised figure to cover the income tax deductions. This is also known as gross wages which are issued to provide the promised amount of salary to the employees. This will allow you to balance the net amount with the promised amount even after the tax deductions. A specific net pay is possible to provide to the employees of your company now.
When is the Right Time to Gross Up Payroll?
People who are in the role of an employer often inquire about when is the right time to gross up the payroll. The first thing to ensure here is that the gross-up has to be before the promised amount that is given to the employee so that there are no tax deductions from the net amount of salary. The employees will get the instant amount and the payroll will have all the details related to the gross amount to the company, net amount and other tax deductions.
Tax gross-ups are used for the one-time payments at some places, however, the regular payroll can also come under this. Let us take the example of an employee with whom you have promised an amount of 40,000 pounds within a year. Now to keep the promised amount intact, you can gross up and the specific amount will be given as mentioned in your agreement.
What is the Procedure to Gross Up Payroll?
The procedure of gross-up involves very few steps that are easy and handy to implement. We have outlined the simple steps in the following:
- The first need is to calculate all the taxes that are applied to the amount of salary a certain employee. This can be the income tax and national insurance that the employee owes before he gets the salary.
- The tax rate can be turned into decimals to figure out the actual amount of tax deduction.
- The total tax rate will be subtracted from 1, this will allow you to have the net percentage.
- Now you will have to divide the net wages by the percentage of the net amount. This will allow you to have a figure of the net amount that you owe to your employees.
What are Other Calculations for Consideration after Gross-Up Payroll?
Sometimes after the gross payroll, all the taxes are still not covered. This usually happens when an employee tends to earn more and approaches the higher tax bands. Then comes the need to cover the progressive tax rate to be implemented. With an increased amount of salary, the employee might fall into the higher tax bands and will have to pay higher amounts of tax in the tax returns. Other calculations that are to be considered vigilantly involve voluntary deductions. These are the deductions that the employer withholds for the sake of a retirement plan or for health insurance.
The Bottom Line
Now that you have gathered a fair amount of information about tax gross-up, we can bring the discussion towards wrapping up. Gross up payroll is beneficial for the employees as it helps to cover the tax deductions and you will receive the promised amount of salary. However, when the employee gets the pay raise, it usually put them in the higher tax band. There has to be an efficient focus on other calculations like voluntary deductions to provide the accurate amount in the salary. This way the taxes will be paid timely and the employee will also be satisfied with getting what is promised. We hope these few minutes of reading will help you to develop a better understanding about what are the benefits of tax gross-up in the UK tax needs.
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Disclaimer: The general information provided in this blog about tax gross-up includes text and graphics. It does not intend to disregard any of the professional advice.