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What is annual income, and what does it mean?

When personal finance is discussed, annual income is one of the critical factors that is often cited. But what is annual income, and what part does annual salary play? We at Moneyfarm will explain all, discussing how to calculate and maximise your yearly income and its overall effect on your personal and household finances.

Does annual salary mean monthly?No, it is annually (within a 12-month period)
Is annual income gross or net?Usually, in gross figures
Is annual income just salary?No, it also includes bonuses, commissions, rental income, overtime, investment income, etc
What is the difference between gross and net annual incomeGross annual income = Before tax deductions

Net annual income = After tax deductions

What is an annual salary?

Your annual salary is the sum of money that your employer pays you over the course of 12 months in exchange for the work you do for that employer. The terms “salary” and “wages” are sometimes used interchangeably, but strictly speaking, they shouldn’t be.

Croner defines the difference between the two terms nicely when they say that salary is a fixed amount paid at regular intervals, usually monthly here in the UK, but in this instance, yearly. In contrast, wages are paid depending on the number of hours worked and the worker’s performance.

What is an annual base salary?

Base salary is your gross salary before any bonuses or commissions are added. The figure is usually used when employers are advertising a job vacancy. It is not normal to pay salaried staff for overtime. However, staff that receive a wage rather than a salary can be paid overtime. Rather than being paid for any overtime worked, salaried staff may be offered time off work in lieu.

Gross salary versus net salary

In answer to the question – what is annual income? – whether it refers to a wage or a salary, it is always expressed as a gross figure. It is the sum of all payments made to you by your employer before any deductions are made.

Net salary is the sum of money you receive after deductions have been made. Deductions include income tax, national insurance payments, health and life insurance, pension contributions, etc.

Annual salary vs annual income

Annual salary is the gross annual salary your employer pays you before deductions. But when it comes to what annual income means – annual income is the amount of money you receive from all sources – not just your employer.

What is gross annual income? Gross annual income, or gross yearly income, is what you need to refer to when doing any financial planning. It can include your salary from your primary employment, including any overtime payments, plus any money you might receive from other jobs or sidelines, and any interest or dividends from savings or investments, including the types of ISAs.

What does gross annual income mean? Well, as well as what was just described, it also applies to money you earn if you are self-employed. It also includes things like any alimony payments you might receive. In other words, it is your total gross income.

How to calculate annual salary

If you are employed on an hourly wage, and you want to know the answer to “what is my annual salary”, how to calculate annual salary requires you to multiply your hourly rate, the number of working hours per week, and when you have the result, multiply it again by the number of weeks in a year.

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So say you are being paid £17.50 per hour and work 36.2 hours per week; the calculation would be: £17.50 x 36.2 x 52 = £32,942.

How to convert annual salary to an hourly rate

If you want to convert an annual salary into an hourly rate, it’s similar to the calculation above but in reverse. So, you start with your annual salary, divide it by 52, and whatever the answer is, divide it again by the number of hours per week.

£32,942 ÷ 52 = £633.30 ÷ 36.2 = £17.50

Annual salary vs hourly pay

What is annual salary versus hourly pay? Which is better? Let’s look at the pros and cons of each, and then you can decide which suits you better.

The pros of salary

  • Consistency – You get a certain consistency with the annual salary. Holiday pay is included, and because you know how much is coming into your bank account every month, it can help you with your financial planning and investment strategy.
  • Extra Benefits – Although it cannot be guaranteed, if you are salaried, you stand a better chance of receiving certain benefits such as gym membership, health care, help with child care, paid holidays, paternity leave, and pension contributions.

The cons of salary

  • No overtime – Sometimes salaried staff are expected to work unpaid overtime if specific tasks are time-sensitive. In some companies, there may also be a culture of “presenteeism.”
  • Pay cut risk – When employers are experiencing financial difficulties, they may reduce salaries to cut costs. You might still be putting in as much effort, if not even more when times are tough while being paid less. This tends not to happen with hourly paid workers.

The pros of being paid hourly

  • Paid overtime – If, as an hourly paid worker, you are asked to work more hours, you will be paid for the extra time. Also, whereas salaried workers might be expected to work on certain holidays for no extra money, hourly-paid workers are often awarded pay at time and a half, double or even treble time.
  • Faster payments – Hourly paid workers sometimes get paid faster than their salaried cousins. Salaried staff are usually paid monthly, whereas hourly workers might be paid weekly or bi-weekly. It means not having to stretch your budget as far.

The cons of being paid hourly

  • Working hours cut back – Employers under financial pressure may cut back the number of hours you can work, which means a pay cut too.
  • Fewer benefits – Hourly paid workers are often not offered the range of extra benefits that salaries staff are.

Although a cut back on working hours might be considered a disadvantage, if it allows you the opportunity to set up an income from a sideline, you might be able to take advantage of the government’s investing for income initiative.

What does annual income mean from an investment perspective?

Once you know your total annual income, you can evaluate your situation to establish whether part of your annual income- net annual income, of course – can be set aside for investing. Before doing so, however, many people like to clear any outstanding debts.

Knowing how to invest money could be key to a more lucrative financial future. Depending on your financial goals and circumstances, you may consider opening a general investment account or a stocks and shares ISA. But bearing in mind that the value of investments can decrease as well as increase, you can determine your investor profile according to your risk tolerance.


What is the median annual income in the UK?

As of April 2022, the median annual income for full-time employees in the UK was £33,000, according to the Office for National Statistics.

What is the highest-paying job in the UK?

As of 2021, the highest-paying jobs in the UK include surgeons, CEOs, chief financial officers, and investment bankers.

What is the minimum wage in the UK?

As of April 2022, the minimum wage per hour in the UK varies depending on age and is as follows: Age 23 and above: £9.50 per hour, Age 21-22: £9.18 per hour, Age 18-20: £6.83 per hour, and Under 18 & Apprentices: £4.81 per hour.

From April 2023, the minimum wage per hour will increase and is as follows: Age 23 and above: £10.42 per hour, Age 21-22: £10.18 per hour, Age 18-20: £7.49 per hour, and Under 18 & Apprentices: £5.28 per hour.

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