How tax on salary (PAYE) is calculated
How employers work out income tax on pay: gross pay, reliefs, tax bands and statutory deductions, explained simply for any country.
In most countries, employers take income tax out of salaries before paying staff and send it to the tax authority. This is often called PAYE (Pay As You Earn); in the US it's federal and state withholding. The details differ by country, but the steps are the same.
Step 1: Gross pay
Add up everything the employee earns: basic salary plus allowances such as housing and transport. Some countries tax the year's total, others work month by month.
Step 2: Reliefs and allowances
Most systems let part of income go untaxed. That can be a tax-free personal allowance, or reliefs for pension contributions, rent, health insurance or dependants. Taking these off gives the taxable income.
Step 3: Tax bands
Taxable income is split into bands, each taxed at its own rate. A higher rate only applies to the income inside that band, not to everything you earn. That's why a pay rise never leaves you with less take-home pay.
Step 4: Other statutory deductions
On top of income tax, employees usually pay contributions such as pension, social security or national insurance, and health insurance. Employers often pay their own share on top of salary.
Step 5: Net pay
Gross pay minus income tax and the employee's deductions is the net pay, the amount that reaches the employee's bank account.
Countries built into our calculator
Our calculator applies the current rules for Nigeria, Ghana, Kenya, South Africa, the United Kingdom and the United States, and shows every band so you can check the maths. For any other country, enter your own bands and rates. To put the result on a payslip, use the payslip generator.
Country guides: PAYE in Nigeria.
Calculations are estimates for planning. Check payroll and filings with your tax authority or an adviser.
