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Income (Gross/Net, Overtime, Bonus, Commission & Allowances)0%

Finance · Topic 1 of 5

Income (Gross/Net, Overtime, Bonus, Commission & Allowances)

Video coming soon3 worked examples

Theory

The Golden Rule: income questions constantly test your ability to read the fine print. Before calculating commission, you must always check if the percentage is applied to total sales or only on sales over a certain amount.

1. Gross Pay vs. Net Pay

  • Gross Pay: The total amount of money a person earns before any taxes or deductions are taken away. This includes their basic salary, plus any overtime, commission, bonuses, or allowances.
  • Net Pay: The amount of money a person actually "takes home" after all deductions (like Income Tax, National Insurance, and pensions) have been subtracted from their Gross Pay.

Formula: Net Pay=Gross Pay−Total Deductions\text{Net Pay} = \text{Gross Pay} - \text{Total Deductions}

2. Overtime

When employees work more than their contracted hours, they are often paid at a higher "overtime" rate for those extra hours.

  • Time-and-a-half: Multiply their basic hourly rate by 1.5.
  • Double time: Multiply their basic hourly rate by 2.

3. Commission

Commission is a bonus paid to sales staff based on the value of the goods they sell.

  • To calculate it, you must find a percentage of their sales.
  • If they are paid commission on sales "over a certain amount", you must subtract that threshold from their total sales before calculating the percentage.

4. Bonuses & Allowances

A bonus is an extra payment given for meeting targets. An allowance is a fixed amount of extra money given for a specific purpose (e.g., a uniform allowance or travel allowance). These simply get added to the Gross Pay.

⚠️ Common Examiner Traps

  • The "Commission Threshold" Trap: a common question states an employee is paid a basic salary plus a percentage commission on sales over a specific amount (e.g., over £50,000). Candidates lose marks by calculating the percentage on the entire sales total instead of finding the difference first.
  • The "Time Calculation" Trap: when working out overtime, a question will often give you a start time and a finish time, but hide a lunch break in the text. Candidates frequently forget to subtract the unpaid lunch break when calculating the total hours worked.
  • The "Gross vs Net" Mix-Up: Candidates often perform complex tax deductions perfectly but forget that the question only asked for Gross Pay, wasting time and losing the final mark. Always double-check which one you are being asked to find.

Worked examples

Example 1

Claire is a car salesperson. She is paid a basic monthly salary of £1,850. In addition, she is paid 4% commission on her monthly sales over £35,000. In August, her total sales amounted to £82,000. Calculate Claire's gross pay in August. (3 marks)

Step 1: Calculate the sales amount eligible for commission by subtracting the threshold from her total sales.

£82,000−£35,000=£47,000\pounds82,000 - \pounds35,000 = \pounds47,000

Step 2: Calculate her 4% commission on this amount.

4% of £47,000→47,000÷100×4=£1,8804\% \text{ of } \pounds47,000 \rightarrow 47,000 \div 100 \times 4 = \pounds1,880

Step 3: Add her commission to her basic salary to find her total Gross Pay.

£1,850+£1,880=£3,730\pounds1,850 + \pounds1,880 = \pounds3,730

Example 2

Marcus is contracted to work 35 hours each week at a basic hourly rate of £11.40. He is paid time-and-a-half for the first 5 hours of overtime he works. Any overtime worked beyond those 5 hours is paid at double time. Last week, Marcus worked a total of 43 hours. Calculate his gross pay for last week. (4 marks)

Step 1: Calculate his basic pay for his contracted 35 hours.

35×£11.40=£399.0035 \times \pounds11.40 = \pounds399.00

Step 2: Calculate his total overtime hours.

43−35=8 hours total overtime43 - 35 = 8 \text{ hours total overtime}

Step 3: Calculate his time-and-a-half pay for the first 5 hours of overtime.

Overtime Rate 1: £11.40×1.5=£17.10 per hour\pounds11.40 \times 1.5 = \pounds17.10 \text{ per hour}

Overtime Pay 1: 5 hours×£17.10=£85.505 \text{ hours} \times \pounds17.10 = \pounds85.50

Step 4: Calculate his double time pay for the remaining 3 hours of overtime (8 - 5 = 3).

Overtime Rate 2: £11.40×2=£22.80 per hour\pounds11.40 \times 2 = \pounds22.80 \text{ per hour}

Overtime Pay 2: 3 hours×£22.80=£68.403 \text{ hours} \times \pounds22.80 = \pounds68.40

Step 5: Add the basic pay and all overtime pay together.

£399.00+£85.50+£68.40=£552.90\pounds399.00 + \pounds85.50 + \pounds68.40 = \pounds552.90

Example 3

Sophia's basic rate of pay is £12.50 an hour. She is contracted to work 30 hours per week. She is paid time-and-a-half for any overtime she works. Last week, Sophia worked 5 days. On each of those days, she worked from 08:30 until 12:30, took a 45-minute unpaid lunch break, and then worked from 13:15 until 16:45. Calculate how much Sophia earned last week. (4 marks)

Step 1: Calculate her total working hours for a single day.

Morning: 08:30 to 12:30 = 4 hours.

Afternoon: 13:15 to 16:45 = 3.5 hours.

Total per day = 4+3.5=7.5 hours4 + 3.5 = 7.5 \text{ hours}

Step 2: Calculate the total hours worked over the 5 days.

7.5×5=37.5 total hours7.5 \times 5 = 37.5 \text{ total hours}

Step 3: Split the total hours into basic hours and overtime hours.

Basic: 30 hours. Overtime: 37.5−30=7.5 hours37.5 - 30 = 7.5 \text{ hours}

Step 4: Calculate her basic pay.

30×£12.50=£375.0030 \times \pounds12.50 = \pounds375.00

Step 5: Calculate her overtime rate and overtime pay.

Rate: £12.50×1.5=£18.75\pounds12.50 \times 1.5 = \pounds18.75

Pay: 7.5×£18.75=£140.6257.5 \times \pounds18.75 = \pounds140.625

Step 6: Add them together and format to exactly two decimal places for money.

£375.00+£140.625=£515.63\pounds375.00 + \pounds140.625 = \pounds515.63

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12 Income questions with answers and video solutions