How to Read Your Pay Slip: A Guide for Young Adults Starting Their Work Experiences

If you’ve just started your first job, you might look at your pay slip and think, ‘Where did all my money go?’

When you receive your pay, knowing how to read and interpret each part of your pay slip, from gross earnings to deductions and net pay is important. This guide breaks down key terminology and covers what to look for when reviewing your pay slip.

Key Terms on a Pay Slip

Before diving into the details, it’s helpful to understand the key terms commonly found on your pay slip:

• Gross Pay: This is your total earnings before any deductions. It includes your salary or hourly wages plus any overtime, bonuses, or other income you may have for that pay period.

• Deductions: These are amounts subtracted from your gross pay for various reasons, such as taxes, insurance, and retirement contributions.

• Net Pay: Commonly referred to as “take-home pay,” this is the amount you receive after all deductions are made.

• Year-to-Date (YTD): This section shows your total earnings and deductions for the current calendar year, giving you an overview of how much you’ve earned and paid in taxes and other contributions so far.

• Pay Period: The timeframe for which you’re being paid, such as weekly, bi-weekly, or monthly. Typically shown as a date range. 

Earnings vs. Deductions vs. Net Pay

One of the first things to understand when looking at your pay slip is the relationship between gross pay, deductions, and net pay.

Gross Earnings

Your gross earnings include all the income you’ve earned during the pay period. For example, if you’re paid $20 per hour and work 40 hours a week, your gross earnings for that week would be $800 ($20×40 hours). Gross earnings may also include any overtime pay or additional earnings such as bonuses and commissions.

Deductions

Deductions are amounts taken out of your gross pay. There are two types of deductions, mandatory and voluntary deductions:

Mandatory Deductions

These deductions are required by all employed residents of Canada:

• Income Tax: This is a key deduction and depends on your total earnings. Canada has a progressive and tiered tax system, which means the more you earn, the higher your tax rate. Income tax rates can vary by province, so it’s essential to know the applicable rates in your province.

• Canada Pension Plan (CPP): A portion of your earnings is contributed to the CPP. Upon retirement or if you become disabled, your CPP will then provide you with income.

• Employment Insurance (EI): This is another mandatory deduction that supports you if you become ill, lose your job, take maternity/paternity leave or have must  become a caregiver.

Voluntary Deductions

These deductions are optional – employees can choose whether to participate.

• Healthcare Plans: If your employer offers health benefits, you may see deductions for your portion of the premium.

• Company Retirement Plans: Contributions to retirement savings plans such as a Registered Retirement Savings Plan (RRSP) or employer-sponsored pension plan may also appear on your pay slip.

• Union Dues: If you belong to a union, regular dues may be deducted from your pay.

Net Pay

After all deductions, your net pay is what remains. This is the actual amount deposited into your bank account. By understanding the deductions, you’ll have a clearer idea of why your net pay is different from your gross earnings and can budget accordingly.

Other Deductions to Consider

Some deductions are not mandatory but can be beneficial for long-term financial health. Here are a few examples:

Company Retirement Plans

Many employers offer retirement plans where they may match your contributions up to a certain percentage. While these deductions reduce your net pay, they are a valuable way to save for the future, often with added benefits such as tax deferral.

Here’s how employer matching works: When you contribute to your retirement plan, your employer adds their match based on a percentage of your salary. For example, with a 3% employer match and a salary of $3,333 per pay period ($40,000 annually), your employer will contribute $100 when you contribute $100. This doubles your retirement savings to $200 per pay period—half from you and half from your employer.

Health Insurance Plans

Employer-sponsored health plans can cover a range of medical services, from dental and vision to mental health support and prescription drug coverage. If you choose to participate in these plans, your share of the premium will be deducted from your pay. This lowers your take-home pay, but it also saves you significant out-of-pocket expenses for medical needs.

Voluntary Benefits

Employers may also offer additional voluntary benefits, such as life insurance or wellness programs. Review your options carefully to decide which deductions are worth including in your financial plan.

Understanding Income Tax Brackets

Canada uses a progressive and tiered tax system, which means you pay higher tax rates as your income increases. This approach helps create a fairer society by having those persons who earn more contribute proportionally more while keeping taxes lower for those with less income. Everyone is expected to pay their share so that all can be provided with the necessary social and economic infrastructure for a thriving country. Here’s a simplified breakdown of federal tax brackets:

• 15% on the first $53,359 of taxable income

• 20.5% on the next $53,359 up to $106,717

• 26% on the next $53,359 up to $165,430

• 29% on the next $63,969 up to $235,675

• 33% on income over $235,675

Your province or territory will have its own tax rates in addition to these federal rates. Understanding where your income falls within these brackets can help you estimate your overall tax liability and plan your finances more effectively.

Tip: Knowing your tax bracket can also help you make informed decisions about RRSP contributions or other deductions that reduce your taxable income.

Tips for Reviewing Your Pay slip

To make sure you understand your earnings and deductions, review your pay slip regularly and pay attention to the following:

• Check for Accuracy: Ensure your hours worked and overtime pay are correctly reflected.

• Review Deductions: Verify that all mandatory and voluntary deductions are accurate and match what you’ve agreed to.

• Compare YTD Totals: Use the year-to-date totals to get an overview of your earnings and deductions throughout the year. This can help with tax preparation and financial planning.

• Ask About Employee Benefits: Regularly, check in with your manager or HR department about available company support programs and incentives. This helps ensure you’re taking full advantage of all employee benefits and opportunities your employer offer.

Understanding your pay slip goes beyond just knowing your take-home pay. It’s about seeing how your earnings, deductions, and net pay contribute to your overall financial well-being. By monitoring deductions and understanding tax rates, you can make smarter decisions about your budget, voluntary benefits, and retirement contributions.