Finance · Topic 1 of 19
Finance Revision & Gross Income
Theory
A person's gross income is the total amount of money they earn from all sources before any deductions (like tax or pension contributions) are taken away.
To calculate a total gross income, you must carefully identify and add together all the different elements of a person's pay. These elements typically include:
- Basic Pay: The agreed-upon fixed amount of money a person receives for their work. This is usually expressed as an hourly rate or an annual salary.
- Overtime: Compensation for working extra hours beyond the requirements of a standard contract. This is often paid at a higher, premium rate (e.g., "time and a half" or "double time").
- Commission: An extra payment based on job performance. This is very common in sales jobs, where an employee earns a percentage of the total sales they make.
- Bonuses: Lump sums usually paid at a specific point in the year, often related to the overall performance of the business or the individual.
A Crucial Trap to Avoid:
Most commonly, people are paid weekly, monthly, or every four weeks. However, you must remember that there are NOT exactly 4 weeks in a month.
- There are 52 weeks in a year, and 12 months in a year.
- If you need to convert a weekly wage into a monthly wage, you must multiply by 52 (to find the annual total) and then divide by 12.
Worked examples
Example 1
Example 1: Calculating Total Gross Pay
Hannah is paid an annual salary of £25,200 for working 150 basic hours per month. She is paid "time and a half" for any overtime hours worked. She also earns commission at a rate of 2.5% on any total monthly sales she makes over the value of £3,000.
One month, Hannah worked 156 hours and made total sales of £6,800. Calculate her gross income for that month.
Calculate Monthly Basic Pay:
£25,200 ÷ 12 = £2,100.
Calculate Overtime Pay:
- Find the basic hourly rate: £2,100 ÷ 150 hours = £14 per hour.
- Find the overtime hourly rate (time and a half): £14 × 1.5 = £21 per hour.
- Find the overtime hours worked: 156 - 150 = 6 hours.
- Total overtime pay: 6 × £21 = £126.
Calculate Commission:
- Find the eligible sales amount: £6,800 - £3,000 = £3,800.
- Calculate 2.5% of this amount: 0.025 × £3,800 = £95.
Calculate Total Gross Income:
£2,100 (Basic) + £126 (Overtime) + £95 (Commission) = £2,321.
Example 2
Example 2: Working Backwards to find Basic Rate
David works in a warehouse. His overtime rate is 30% greater than his basic hourly rate. Last week, his gross income was £638. He worked 35 basic hours and 8 overtime hours.
Calculate David's basic hourly rate of pay.
We can set this up as an algebra problem. Let David's basic rate be .
- Basic pay =
- Overtime rate = (because it is 30% greater)
- Overtime pay =
Now, add them together to equal his total gross income:
David's basic hourly rate is £14.05.
Example 3
Example 3: Time Period Conversions
A local factory offers two different contracts for a packaging role.
- Contract A: Pays £420 per week.
- Contract B: Pays £1,750 per month.
Determine which contract offers a higher annual gross income.
- Contract A (Annual): £420 × 52 weeks = £21,840.
- Contract B (Annual): £1,750 × 12 months = £21,000.
Contract A offers a higher annual gross income, despite £1,750 appearing larger than exactly 4 weeks of Contract A's pay, highlighting why we cannot simply assume 4 weeks in a month!