Calculating Your Net Pay
What are all these deductions and why do i have to pay them?
You have received your payslip as a new employee (or one working for a couple of years) but you have no idea what the items on it really mean. No worries! By the time you’ve finished this article you should have an idea what your statutory deductions are and how they are calculated. A statutory deduction is a mandatory amount that is deducted from your gross pay and paid over to the government.
In general, I would classify deductions from your income as follows:
- Statutory Deductions
- Pension Deductions
- Loan Repayments
- Other Deductions
Some employers may facilitate just the first 1 or 2 and others may facilitate any type of deduction that can be taken from your income and paid over to another entity on your behalf e.g. insurance premiums, car loan payments to a credit union, student loan payments, investment savings or charitable contributions. Setting up salary deductions makes it a hassle free and easy way to meet your obligations without having to worry to transfer the amount each month (or fortnight etc.). I will focus on explaining the first two deductions – statutory and pension deductions.
How are deductions calculated?
Specific employers may have additional calculations and considerations so the information below is general information. Check with your employer if you are concerned with any of the calculations or if there are any differences on what is considered taxable or non-taxable income.
I am explaining pension deductions first because statutory deductions that are paid over to the government are calculated based on your non-pensionable income. In other words, if you are making a contribution to a pension plan (which allows up to 20% being paid by you and your employer) and/or the National Insurance Scheme (N.I.S. – which I will explain later on) then that total amount is taken out first and then the other statutory deductions are calculated on the remainder (called the statutory income).
This can make a big difference in the amount that used to calculate your statutory payments. Here is a simple example:
Employees A B and C have the same income of $250,000
- Employee A does not make any voluntary pension contributions to the employee pension plan offered by her company.
- Employee B contributed only 2 percent to voluntary pension. The maximum compulsory and voluntary pension amounts are usually dictated by years of service, but the pension scheme may have different rules that indicate how much can be contributed to each.
- Employee C has maximized both the voluntary and compulsory pension amounts (each is 5%). Since employee C pays more in pension, their statutory income is less and their income tax payment is also lower.
Therefore, by not maximizing your voluntary pension, you are giving money to the government in taxes that you could be saving towards your future retirement. If you leave the company the pension can either be transferred to another company or returned to you as a cash payment. As your income increases, the amount you are paying in tax that you could be saving becomes much greater. See my article here on the importance of a pension plan.
As shown in the example above, statutory deductions are calculated from Gross Income after pension payments are deducted (recall this is called Statutory Income).
In addition to N.I.S., the other statutory deductions are:
- Income Tax – P.A.Y.E.
- Education Tax
Pay As You Earn
Calculated as 25% of the amount of statutory income above the tax threshold. If statutory income is larger than $500,000 then the tax rate is calculated as:
– (Statutory Income – $500,000)* 30% + ($500,000 – Tax Threshold) * 25%
The Tax Threshold is the amount of gross pay which no tax is charged on. It is currently $125,008 per month. The amount that is used to calculate your P.A.Y.E. is called this taxable income and in general, Taxable Income = Statutory Income – Income Tax Threshold.
Education tax is used to support the finances of the Ministry of Education. Education tax is calculated at 2.25% of taxable income for employees and employers are required to pay 3.5%.
National Housing trust or N.H.T. is paid over to that government entity to provide Jamaicans with housing benefits after they qualify to access same. NHT is calculated at 2% of taxable income for employees and employers pay 3%. See my article on the benefits of the N.H.T. here, for more information on how to access your NHT benefit to purchase land or a home.
National Insurance Scheme or N.I.S. is used to provide Jamaicans with a pension when they reach retirement age. This pension payment is payable once you have contributed through salary payments at any point in your working career once the person has made over 1443 weeks (3 years) of payments. The N.I.S. has several other benefits that can assist Jamaicans if they are unable to continue working. Visit the Ministry of Labour’s website https://www.mlss.gov.jm/departments/national-insurance-scheme/ to learn more about those benefits.
NIS is calculated at 3% of your gross income but it is capped at the maximum of the insurable wage ceiling which is currently $3 million per annum or $250,000 per month. In other words, the maximum amount for N.I.S. deductions is 3% of $250,000 or $7,500 per month.
See my article here on the insurable wage ceiling and the plan to increase it again (to $12,500) in April 2022.
A summary of the four statutory deduction payments made by employees:
- Income Tax – P.A.Y.E. (25% for amounts over the tax threshold*)
- Education Tax (2.25%)
- N.H.T. – (2%)
- N.I.S. – (3% up to a max of $7,500)**
*Tax Threshold – Amount of gross pay which no tax is charged on. Currently $125,008 per month.
** See my article on the Insurable Wage Ceiling for NIS calculations. This amount will increase to $12,500 in April 2022.
There is also a payment made by your employer on your behalf towards the Human Employment and Resource Training (HEART). Your employer pays 3% of your gross income on your behalf towards this program. HEART contributions are used to fund training and certification programmes for all working-age Jamaicans.
1-Jane Doe – Earns lower than the tax threshold so pays no income tax.
NTX – means non-taxable. No taxes are charged from this portion of your emoluments (income). There are specific income types for which no tax is charged.
2-John Brown – Pays income tax on amounts above the tax threshold.
So again, ensure you maximize your voluntary pension to get the most out of your income and boost your savings goals!
How Can I Calculate My Own Taxes?
You can access my Net Pay Calculator here: financialcentsibility.com/calculators
If you are a small business owner in Jamaica I recommend you sign up with MCS BizPay that offers a product that can calculate all of the requisite payments and generate payslips for your employees. https://www.mcsystems.com/biz-pay-central/
Shout out to @KimTerriRose on Twitter for helping me to figure out these calculations!