What is a Tax Gross Up for Payroll?

tax gross up

When you are in the role of an employer, you do aim to satisfy the needs of your employees in order to reward their services for your company. Most of the time when you plan to pay a certain limit of the amount in the form of wages to them, however, you will have to cater for the challenges of tax factors and relevant deductions. As a result, the amount you plan to pay to your employees gets really smaller. Here come the roles of tax gross-up to ensure that the employees are paid with the net amount. This is quite a challenging process for employers to get the right calculations after the tax is dedicated from the wages of each employee. As this detail has to go to the HMRC knowledge and you will have to justify the net pay as well as the tax deductions.

To implement the accurate method of calculation and avoid any hindrance in the process of grossed-up tax, there must be the involvement of the right professionals. Otherwise, the errors in calculations can cause serious circumstances for your company and you even have to deal with the HMRC investigation. If you are making major errors, you will end up paying hefty amounts as fines and other penalties. So it is imperative to understand the basics of how tax gross-up works, how to do the calculations, whether it is able to cover all the taxes, and what are the pros and cons for the employers as well as the employees.


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Tax Gross-Up – A Way to Increase the Gross Amount

Gross up explains the act of giving some additional amount of money to your employees that will allow offsetting the effects of some tax deductions. This is to ensure that the ultimate figure of wages that is promised to the employees is actually received by them. Employees who are highly compensated also get gross-up wages from their employers. Such a case means that the salary of these employees is stated in the take-home form. This is because the promised take-home salary is always different from the gross salary because there are necessary tax deductions.

In simple words, we can say that the gross salary is always more than the salary promised to the employee because the employer will have to compensate for the relevant tax deductions. This will allow providing the exact promised figure to the employees after the taxes are withheld from the payments. The net amount must be the exact figure that you have told your employee to be paid. It is a kind of process of reimbursement for the tax withholding process.


How Do You Do the Tax Gross-Up Calculations?

It only requires a few basic and easy steps to make the right calculation of the tax gross-up. These are explained in the following.


1- Add Up the Tax Rates

In the first step, all you have to do is to find out the figure after adding all the taxes that are applicable to the wages of your employees. This could possibly include income tax, national insurance contribution, and other such deductions a swell.


2- Change the Total Rate into the Decimal Figure

You will have to change the resulting figure to a decimal figure if this step is not done already with step 1. It is as simple as moving the decimal two figures to the left side. Let us take the example of a percentage that is a total of 35% and converting it into decimal will give you the figure 0.35. Furthermore, to get the net percentage you will have to subtract the final decimal figure from the number 1. This can be stated as

1 – Total Taxes = Net Percent.


3-  Net Wages and Net Percentage

In the last step, you will have to divide your net wages by the net percentage to get the gross amount of wages. Now, this is the amount that you have promised to your employees and you will give them as wages. This can also be stated as

Net Pay / Net Percent = Gross Pay.


Does Grossed-Up Pay to Cover All the Taxes?

After the procedure of tax gross-up, all the taxes are still not covered. This is where employers and beginners get confused. This is because of the fact that when an employee starts to make more wages, this might allow them to come under the higher tax band. This will make them pay more tax as the tax rates will be increased in such a case. There must be a consideration of all types of taxes to be covered in this regard. Such kinds of tax liabilities and tax deductions need your close attention and focus to avoid any kind of misunderstanding and wrong deductions from the wages of employees.


The Bottom Line

Now that you have gathered a fair amount of information about what is tax gross-up, we can bring the discussion towards wrapping up. The tax gross-up for the payroll helps a lot to keep the matter of employee wages and tax deductions in balance. However, it comes up with a lot of responsibilities to handle as well. You will have to pay close attention to the calculations because you can end up paying a hefty amount of penalties if you make frequent mistakes. HMRC will take immediate notice and the process of self-assessment tax return and tax deductions from the wages will not be applied professionally.


The rules of tax gross-up become tricky when you have a higher chance of making an error in your returns. Our professional and detail-oriented accountants can help you! Get in touch with us.


Disclaimer: All the information provided in this article on what is tax gross-up in the UK, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice in this regard.