The purpose of a payslip

The purpose behind a payslip is to provide the employee with an explanation as to how the payment into their bank (known as net pay, or take home pay) has been calculated, usually from an initially higher figure (known as gross pay). 

Showing adjustments on a payslip

An employee’s wage may be based upon an annual salary or an hourly rate, or something else. It is important to ensure you provide as much clarity regarding the make up of their wages as possible.

Salary adjustments

Calculations relating to an annual salary are very often straightforward and most salaries are calculated by taking the annual salary and dividing it by 12. Occasionally, however, adjustments need to be made to this salary. For example, an employee may start partway through a month, or they may have taken unpaid time off, or they may leave partway through a month. 

It is important, therefore, that any deductions are calculated based on the annual salary and the number of days worked in a year. This is because some months have a different number of days as well as a differing number of working days. There are fewer days in February than any other month, therefore if you were to look at February alone and take this monthly salary divided by the number of days, the employee is earning more per day than they are in a month containing 31 days. 

However you choose to calculate a deduction, I recommend you show this clearly. An example might be:

 

• Monthly Salary £2,833

• Part month worked deduction  £-324.50

This is preferable to showing the salary simply as £2,508.50. 

Showing the original figure and the deduction separately helps the employee understand the change, and may even help during a wages dispute, or minimum wage checks because you’ve clearly documented the adjustment. 

Hourly rates

Wages based on hourly rates must be listed showing the number of hours and the hourly rate. If an employee has worked 180 hours in a month at £16 per hour, made up of 45 hours one week, 26 hours the second week, 25 hours a third week, and 84 hours the fourth week, at the very least you should show is:-

Hourly wage   180 x £16 

Even better, however, would be to show the hours and rates as four separate lines on the payslip.

Hourly week 1   45 x £16

Hourly week 2   26 x £16

Hourly week 3   25 x £16

Hourly week 4   84 x £16

Statutory deductions

Statutory deductions, and additions such as national insurance, pension, tax, student loan, attachments of earnings, maternity pay, paternity pay, adoption pay etc. must always be shown separately.

Why do it?

There are many reasons why payslip clarity is important. Firstly it helps the employee to understand the payment they’ve received in their bank account and the journey their wages have taken from the original agreed gross wage through to their take home pay. This can save time in answering any queries your employees may have, but also bear in mind some employees may struggle to understand their payslips, and may not be confident in asking for an explanation.

Secondly, a payslip is a legal document and can be used in many situations. For example, a payslip may be used during an employment tribunal, particularly if the dispute relates to pay.  Some deductions cannot be made for wages if it brings the employee’s payment below national minimum wage. 

In summary

Split out as much as possible on a payslip with as much explanation as you can, and try to avoid making the calculations external to the payslip wherever possible.