Net income refers to the amount you earn after deductions such as tax, pensions and student loans. It is sometimes referred to as ‘take-home pay’.
Your net income does not take into account any money accrued through share dividends, interest on savings, or any other “passive” income.
It only looks at income from wages/salary, tips, bonuses or commission you receive from your job. It can also be money you earn through being self-employed.
Gross income is your total salary while net income is the amount you’re left with after costs such as pension contributions, student loans or child maintenance payments have been deducted.
Net income is the amount transferred into your bank account each month by your employer.
When you use a Net Income Calculator, it will typically deduct income tax, national insurance and any other workplace schemes.
As an example, let’s imagine you earn a gross salary of £30,000 a year, this is the amount you would see on your contract.
Each month however, there are deductions made which reduce the amount you take home. These could include:
After these are taken, the £30,000 gross income equates to a monthly net income of £1,995, based on simple UK calculations.
Your net income helps your finance company to assess your loan affordability.
For example, if you’re looking to get a £30,000 car loan and you have a net income of £18,000, this is unlikely to be affordable, especially once you factor in additional expenses such as a mortgage, utility bills and lifestyle.
Once you factor in these additional expenses, your affordability may change. So, to get the most accurate picture, lenders will often look at your disposable income too.
During the car finance application, the lender will ask for proof of monthly income to ensure that the net income stated is correct.
Depending on the company, proof of income can typically be your most recent payslips, and a copy of bank statements to show any commission or bonus payments that you have received.
For car finance applicants who are self-employed, net income can be defined by the amount you have left after any business expenses, pension contributions and money set aside for tax.
This is sometimes referred to as ‘net profit’.
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