What is basic salary
What is basic salary
What is basic salary?
2 min read | 3 March, 2022 By Aimee O’Callaghan
Basic salary is a term seen commonly on job descriptions. Also referred to as basic pay, what does it actually mean?
In this blog, we’ll cover examples of additions & deductions to basic salary, along with on-target earnings.
What is basic salary?
Basic salary refers to the amount that an employee earns before any extras are added or payments are deducted.
Examples of additions to basic salary
Additional extras on top of a basic salary can include:
Examples of deductions from basic salary
Deductions from basic salary can include:
Basic salary vs. on-target earnings
An example of a basic salary might be £25,000. This is what you would advertise as the rate of annual pay if you are hiring for a new role. That will exclude any bonuses you might offer, as well as allowances and expense payments.
When it comes to sales roles, you may offer a basic salary only or, if you pay commission, it’s common to express the offered salary as on-target earnings – known as OTE. On-target earnings are the basic salary equivalent that an employee can expect to be paid if they meet all their sales obligations. This can include a basic salary with an element of commission, but some organisations choose to pay commission only.
When it comes to the actual monthly or weekly payment, as summarised on a payslip, the basic salary is detailed. Any extras are added, and any deductions – as well as tax and national insurance – will be subtracted.
A typical pay slip separates and sub-totals the additions and the deductions, which makes the payslip easy to read.
You can find more information on payroll in our blog and resource.
Author: Aimee O’Callaghan
Aimee is a Content Assistant here at Breathe. She enjoys writing about topical HR issues and helping readers find solutions. In her spare time, she is commonly found amongst books.
What is Basic Salary?
Basic salary refers to the amount of money that an employee receives prior to any extras being added or payments deducted. It excludes bonuses, overtime pay or any other potential compensation from an employer. The whole amount of basic salary is part of the take-home salary. Basic salary is fully taxable.
Basic salary forms the core of the salary structure, constituting for 40-45% of the total CTC. Other salary components like Gratuity, Provident Fund and ESIC are determined according to the basic salary. The designation of the employee as well as the industry in which he or she is in, are some of the components factored in while assessing the basic salary.
Factors to Keep in Mind While Setting Basic Pay
Employers need to keep the following points in mind while deciding on how much the basic pay for an employee should be:
How is Gross Pay Different from Basic Pay?
As mentioned above, the basic pay is the minimum sum of earnings that an employee is to receive. The individual may receive additional money by earning incentive bonuses or working overtime. The extra earnings made from logging in overtime does not raise the employee’s basic salary. Similarly, the monetary incentive paid out by the employer throughout the year does not impact the basic salary. Basic salary will usually be less than the gross salary.
On the other hand, gross pay includes not just the employee’s base pay, but also any additional earnings. Say, if an employee puts in extra hours or is the recipient of an incentive bonus, the additional earnings shall appear in the individual’s gross pay. It must be noted that gross salary does not include any deductions made. It is the salary paid after totalling all benefits and allowances, but before making deductions like employee provident fund (EPF) and taxes.
To sum it up, gross salary is made up of the following:
Contribution to Pension/Provident fund, Group Life, etc.
House Rent Allowance, Travel Allowance, Children Education Allowance and other similar allowances
Overtime and Bonus
What is the Difference Between Basic Pay and Net Pay?
While basic salary does not include any of the deductions made, net pay is what an employee takes home after all the required deductions are made.
Net salary (also referred to as the Take-Home Salary) can be calculated by first adding up basic salary, HRA and allowances and then deducting income tax, EPF and professional tax from it. The net salary will be less than the gross pay on account of mandatory and voluntary payroll deductions.
Frequently Asked Questions
What is included in basic salary?
Basic salary is a fixed amount of money that an employee receives prior to any extras being added or payments deducted. It does not include bonuses, overtime pay or any other potential compensation from an employer.
Is basic salary gross or net?
Basic salary is different from gross pay and net pay. It is a fixed amount of money that an employee receives prior to any extras being added or payments deducted. Gross pay, on the other hand, includes not just the employee’s base pay, but also any additional earnings. Net salary (also referred to as the Take Home Salary) is what an employee takes home after all the required deductions are made from the gross salary.
How DA is calculated in basic salary?
Dearness allowance (DA) is computed as a percentage of basic pay. This amount will differ depending on the location of the employee.
Is overtime pay part of basic salary?
No, extra pay for overtime work does not form part of the basic pay. It is factored in while calculating gross salary.
What is basic pay and grade pay?
Basic pay is the minimum sum of earnings that an employee stands to receive. Government employees, apart from basic pay, also receive grade pay, which is calculated depending on the category or class of the employee. The total of basic pay and grade pay is used in assessing dearness and other allowances.
How much is basic salary of CTC?
Usually, basic salary is 40% to 50% of CTC (Cost to Company). Statutory components such as bonus, PF, gratuity and other benefits are determined on the basis of the basic salary. Any increase or decrease of basic salary can affect an employee’s CTC.
Is basic salary taxable?
Yes, basic salary is fully taxable.
What are the various components found in the salary structure?
The components of the salary structure are basic salary, dearness allowance, medical allowance, conveyance allowance, HRA, leave travel allowance, children education allowance, children hostel allowance, mobile & telephone reimbursement, car maintenance, driver salary, books & periodicals and special.
What are the various deductions applicable to CTC?
Some of the common deductions applicable while determining take-home salary are Provident Fund, ESIC, Professional Tax and Labour Welfare Fund.
What is Base Salary: definition and ways to determine it
Last updated: 11 May, 2022
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Whether you’re an employer or an employee, it’s critical to know all components of the compensation package and calculate how much you or your workers will earn when agreeing to a job or negotiating a raise. And here’s where the understanding of base salary can help.
Base salary meaning
Base salary, aka base pay or basic salary, is a fixed sum of money that an employer pays to employees in exchange for their accomplished work. This term doesn’t consider salary benefits, bonuses, or any other possible reward from the company.
If you apply for a job, the base salary is the sum of money that an employer offers you for specific tasks. Your job description can also include extra details about other financial components of your future wages if you accept the offer. However, the base pay you are proposed remains consistent.
It’s most commonly expressed as an hourly rate, base monthly income, or annual base salary.
Who receives base salary?
Now that we’re done with the base salary definition let’s consider who receives it. Basic salary is paid to exempt or professional employees who are expected to work for a set number of hours per week (usually 35-40). Such workers usually are not required to track the number of hours they spent on work. And if they work overtime, salaried employees don’t get paid for it.
Surely, it can differ depending on the employer. Some employees from the public sector, often union-represented ones, are expected to keep a record of compensatory time off, which is not the standard in private companies. Compensatory time for base-salaried workers is, as a rule, the result of the union workplace.
Is base pay gross or net?
Base pay and gross pay may seem to describe the same or similar things. But there’s a significant difference between the two. Gross income represents wages received, which includes the employee’s base salary and additional earnings and financial bonuses. Meanwhile, net income is the amount left over taxes and health insurance.
What is base income and isn’t it the same as annual pay?
Again, even though these two concepts sound similar, they are different. As mentioned earlier, base income doesn’t take into account any extra compensation, such as health insurance, commissions, bonuses, stock options, etc. In contrast to it, annual pay includes additional earnings (e.g., overtime and awards) over the year.
What employers look at to determine the base salary range?
The salary range is set by companies to pay their employees for a specific job. It usually includes the smallest pay rate, the highest pay rate, and a number of mid-range options for salary raises.
The base salary can be defined by several determinants:
Base salary rates also depend on the average market pay outside of the company’s geographic area. The reason for this is that the desired skills become more difficult to find, and businesses increase base salary rates to hunt the talent they need and gain competitive advantage.
In the end, businesses want to create salary ranges that motivate their staff to contribute. They also want to attract and retain the best employees.
How to keep base salaries competitive
A reliable source of information about the base salary in the US is the Bureau of Labor Statistics (BLS). Its website gives the employer salary research data for many different professions in multiple industries, as well as for people who work in various geographic areas.
More information on base salary is accessible to businesses through the SHRM Compensation Data Center. Many organizations participate in market surveys of salary ranges to form a reliable source for salary analysis. Nowadays, wage studies are happening online with the help of salary calculators and comprehensive info sources obtainable from such websites as PayScale.
These info resources give an employer an opportunity to see the base salaries range that specific positions are paid. Besides, it allows applicants to see identical information. An advantage that businesses had in the past doesn’t give them superiority in the negotiations regarding base salary anymore.
Wrapping it up
To retain excellent talent, most companies use all means to guarantee that base salaries they pay are reasonable and fair. We hope this information will help you manage payment and salary issues in your company in a way that increases staff motivation and builds rapport.
Basic Salary Meaning
What Is Basic Salary?
Basic salary, also called base salary, is the amount of money a salaried employee regularly earns before any additions or deductions are applied to their earnings.
Additions and deductions to basic salary can significantly affect the size of an employee’s paycheck. These adjustments may include such things as added bonuses or deductions for the employee’s company health insurance premium.
How Is Basic Salary Calculated and Paid?
Salaried workers receive the same fractional amount of their annual basic salary every payday. To determine the amount, their annual basic salary is divided by the number of pay periods in a year at that company. For example, if the company pays workers twice each month, there will be twenty-four paydays in a year and the employee will receive one twenty-fourth of their annual basic salary on each payday.
What Is the Difference Between Basic Salary and Hourly Pay?
Employees who are paid a basic salary receive a fixed amount each pay period regardless of how many hours they work. In contrast, employees who receive hourly pay are compensated for the number of hours they work. Unlike most salaried workers, hourly workers are generally also entitled to overtime pay if they work more than 40 hours in a week.
What Is the Difference Between Basic Salary, Gross Earnings, and Net Wages?
Each of these terms tells a different part of the story of an employee’s compensation. Unlike basic salary, gross earnings and net wages take into account additions and subtractions to an employee’s standard rate of pay:
For example, Jamal is hired by a company that agrees to pay him 4,000 dollars per month. That is his basic salary. When he receives his first monthly paycheck, he sees that he has also been paid a 1,000-dollar hiring bonus, so his gross earnings for the month total 5,000 dollars. After his employer withheld federal, state, and local taxes on that amount, along with Jamal’s share of the cost of his employee benefits, the remaining amount shown on his paycheck is 3,950 dollars. That amount is his net wages.
Can Basic Salary Change?
Basic salary may go up or, in some cases, be reduced. Many jobs have a salary range—a minimum and maximum amount that a company is willing to pay to fill a position. The salary range is based on market rates for that work as well as the experience and skills of the employee. A new hire with little experience might be paid the minimum amount in that salary range as their basic salary. As the worker gains more experience and improves their skills over time, they may receive raises in their basic salary and eventually reach the maximum pay for their position.
Reductions in basic salary are less common. They may result from company belt-tightening in difficult economic times. Companies are free to reduce an employee’s basic salary unless there is a formal employment contract that requires a specified salary to continue. But in the absence of a contract, employees are also free to leave the company instead of accepting a lower basic salary.
What is basic salary?
Payslips can be confusing, and the difference between your official salary and take-home pay often seems unfair. Here’s how you can understand a salary breakdown, and some tips on how to receive as much of your official salary as possible.
How do you decode your pay slip?
According to the Annual Survey of Hours and Earnings (ASHE) 2016-2017, the average gross weekly pay for full-time employees was £550. Average starting salaries vary between £19,000 and £25,000 per year, depending on the sector and where you are working in the UK. Per hour, the national living wage will be roughly £8.50 in 2019.
Employees will see the number for their monthly (or weekly) salary on their payslip. However, the pay slip will also show that a chunk of this money is taken off after your employee has paid it.
The base level of money an employee receives is their basic pay. This is the minimum amount an employee can expect to receive from their salary, after tax and before any bonuses.
Basic salary is not the same as gross salary – gross salary is the total of all the money you are being paid for doing your job. It is your cost to the company (CTC). In the UK, you won’t ever receive your gross salary. Deductions are made for income tax, student loan repayments and more.
The amount of money that is taken off an individual’s gross salary will vary from person to person. It is affected by an individual’s tax bracket, debts, pension schemes and insurance policies. You will see the breakdown of these deductions on your payslip.
Where is my gross pay going?
Some deductions are generally guaranteed. For instance, every able worker in the UK pays National Insurance if they earn over £162 per week. Also, those with an annual salary above £11,850 will pay some amount of income tax on any money they earn over that £11,850 threshold.
The first £11,850 – that’s £228 per week – is your Tax-Free Allowance, and will not be taxed (£12,500 for 2019-2020). After that, any money you make, up to £46,350, is taxed at 20% (£50,001 for 2019-20). £46,351 to £150,000 is taxed at 40% (£50,001-£150,000 for 2019-20). Over £150,001 is taxed at 45%.
So where does basic salary fit into this?
Basic salary is the main component of your take-home pay. It’s your net salary without any special allowances that might also be added on. If you are working regular hours it should be a fairly consistent and predictable number. It’s useful to know how much your basic salary is alone in order to have an idea of your minimum monthly budget.
Think of basic salary as your classic margarita pizza. Of course, both concepts are well-loved staples in our lives. You waited all month for ‘pizza’ day, it’s a delicious feeling, and it’s just what you need when your bank account is starting to look a little hungry.
For some, this is the only pizza they need. Others might be expecting a few extra toppings. Here are some ‘toppings’ an employee might have in addition to their basic, cheese-and-tomato salary.
What can be on top of a basic salary?
Bonuses
Customarily given at the end of the year as a Christmas bonus, this cash reward acknowledges a year of hard work. They could be tied to meeting revenue goals, employee retention, or recruitment. The size of the bonus can vary indefinitely, from £100,000 to no bonus at all.
A median annual performance-based bonus often weighs in at 10% of an employee’s annual basic salary. It can also be awarded in the form of company shares or small gifts. With Perkbox, you can even reward your employees with a skydiving experience.
Overtime
It is a legal requirement for employers to pay the National Minimum Wage for the total hours worked, including overtime. Employers should recompense workers for overtime work, as laid out in the employment contract.
Many companies adopt a ‘time-and-a-half’ policy when it comes to overtime hours, which means workers can take home an extra 50% for working longer hours, or picking up unpopular shifts.
Commission
Some companies award benefits related to an individual’s statistical performance. If specific sales or achievements are credited to an employee, they will receive a commission. Similarly, tips and gratuities will be added on to the basic salary when they go through the company.
For instance, a restaurant that pools tips and redistributes them evenly alongside wages. Tips paid directly from customers to staff are not included in this.
Expenses
Employers will reimburse an individual for spending money when conducting business. For instance, this could be a business lunch or the cost of transport to a conference. Obviously, this is within reason. The finance department might point out that your ‘business lunch’ didn’t have to include two bottles of champagne.
Non-monetary extras
Other additions to a basic salary might include a company car, mobile phone contract, or laptop. These are usually necessary for an employee to do their job.
A monthly income with all the relevant extras and no tax deducted is your gross salary. That same income with the right deductions for tax, pensions and debt repayments is your take-home pay. Starting to get the hang of it? Time for a level-up.
What can be deducted from basic salary
On the flipside, some employees might not want their whole basic pay-pizza at once. Like saving a slice for later, there can be reductions to an individual’s basic salary. This isn’t a punishment for poor performance! The slice of basic salary is given to the employee in other ways.
As we have seen, rewards at work are traditionally financial. However, employees increasingly want to enhance the lives of their staff beyond handing over a pay packet. This broader approach is good for business and creates a happier working environment.
One way to benefit employees is through salary sacrifice. This involves an employee sacrificing an agreed amount of their gross salary to receive a benefit sponsored by the employer. These benefits are not taxed like the rest of their regular gross salary.
Controversial opinion: paying taxes is great. It’s your chance to contribute to the everyday improvement of the country; you can pave roads, teach children in schools and save lives in hospitals, without having to think about it at all. That being said, it can be nice to avoid Income Tax and National Insurance on some parts of your hard-earned income.
This is where salary sacrifice comes in. Employers offer to compensate their workers’ agreed salary reductions by paying an equal amount into a tax-free scheme. For instance, employers could finance healthcare schemes or extra pension contributions.
It means both employers and workers can sidestep some of their usual taxes. It also allows employers to provide for their workers in a more personal and comprehensive way.
Communication is key here to help employees see the salary sacrifice as a positive. Any financial sacrifices should be put down in legal writing so the newly reduced salary is clear to both parties.
Salary sacrifice benefits cater to the lifestyles of employees. They can include childcare vouchers, cycle to work schemes, or gym memberships. They can also cover a large area of discounts and activities – with Perkbox, employees have access to schemes including private healthcare, gyms, tech, and even cars.
Read next: Employee Benefits – a guide for success
These schemes are a great way to make the workplace a more providing environment. At Perkbox, we offer 100s of rewards that employees on the scheme can access. Members can sacrifice their salary to help pay for holidays, new phones, cars, bikes and nursery costs. Who doesn’t want to save on their summer holiday?
Whether you are an employer or employee, it is useful to be aware of the pay slip’s breakdown. Knowing how much of your salary is your guaranteed basic income can help with daily budgeting, and can help you realise if you’re being taxed incorrectly.
Even better, salary sacrifice schemes can help employees save even more of their income, and ensures that big bills like nursery fees or car payments will be accounted for. This helps employees feel financially secure and well looked-after, increasing employee engagement.