How is Back Pay Calculated? A Guide For Employers in The UK
Back pay refers to the difference between the amounts that an employer pays to an employee and what they should be paid. Backdated or retrospective pay is the wages or salary that an employer owes to an employee for the work they already performed in the past. However, the employee was not paid correctly at the appropriate time. There are various reasons as to how back pay may arise, such as payroll miscalculations, overlooked pay raises, incorrect classification of employees, unpaid overtime, or failure to meet minimum wage laws. However, if an employee makes a valid and tangible claim of back pay, employers are obligated to pay the amount. Therefore, it is essential for employers to learn how is back pay calculated to comply with UK employment laws and HMRC regulations.
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How is Back Pay Calculated?
The following steps elaborate on how is back pay calculated so that the employers make no miscalculations and the claimant employees receive their due amount:
Identify The Period For Back Pay:
The first step in understanding how is back pay calculated is determining the time period during which the underpayment occurred. It can take place owing to different reasons, including:
- A pay rise that was applied late.
- Unpaid or underpaid overtime.
- Errors in payroll calculations.
- Failure to meet National Minimum Wage (NMW) or National Living Wage (NLW) requirements.
Essentially, you must review employee contracts, payroll records, and historical pay slips to spot any discrepancies.
Determine The Correct Pay Rate:
Once you have identified the period, you need to establish the correct pay rate for the employee, which may include:
Basic Salary or Hourly Wage:
- You must apply the correct rate based on each period.
Overtime Payments:
- In the event that an employee worked overtime but it was not paid correctly, you will include their extra hours at the appropriate rate.
Bonuses or Commissions:
- If applicable, you need to include any performance-based pay you owe to the employee.
It is worth pointing out that employers must also take into account the impact of any changes in National Minimum Wage (NMW) and National Living Wage (NLW) rates during the period.
Calculate The Total Back Pay Owed:
There are different ways to calculate back pay based on the correct pay rate, as discussed above. Primarily, an employer will adhere to the following steps to calculate the total back pay owed:
- They will first multiply the number of unpaid or underpaid hours by the correct hourly rate.
- If there were any overtime, bonuses, or commissions that were not paid, they would also be added.
- Deduct any payments that were already made to the employee (if applicable.
The following examples illustrate how is back pay calculated under different scenarios:
Overlooked Pay Raise:
Mathew was supposed to receive a pay increase from £10.50 per hour to £11.00 per hour. Notably, his pay raise was overlooked at that time. Nevertheless, the increase was applied two months later. Now, since Mathew works 40 hours per week, the difference in his pay per hour: £11.00 – £10.50 = £0.50
Accordingly, the total number of underpaid hours in two months:
40 hours × 8 weeks = 320 hours
Thus, the total back pay owed to Mathew: 320 hours × £0.50 = £160
Hourly Employees:
John works for an accounting company where he is paid an hourly rate of £9. After the payroll processing, John got paid for 30 hours of work last week. By contrast, according to the timesheets, he had worked for 35 hours. Consequently, the payment for the additional five hours John worked will be paid at an overtime rate of £10 an hour, such as:
30 x £9 = £270
5 x £10 = £50
Eventually, the company will give John a back pay of £50 to compensate for the overtime he worked last week.
Salaried Employees:
Calculating back pay for salaried employees is not as straightforward as for hourly employees. Consider the example to understand this.
Kate has an annual salary of £40,000. Although Kate worked an extra day last month, it was not covered in her salary. Noteworthily, according to Kate’s contract, any overtime done will be calculated separately and based on her annual salary. Hence, it implies that the employer will first calculate her daily wage based on the number of working days per year. As the total number of working days in a year is 260, Kate’s daily wage is:
£40,000 / 260 = £153.8.
Ultimately, since Kate worked an extra day the previous month, the back pay owed to her is £153.8.
To learn more about the back pay, read:
Calculate Income Tax And National Insurance (NI) On an Employee’s Back Pay:
Just like the regular earnings of employees, back pay is also subject to income tax and National Insurance (NI) deductions. Therefore, it is compulsory that employers calculate and deduct these amounts before making the final payment.
If you are wondering how the back pay is taxed and how the necessary deductions are made from it, our following guide will answer all your questions about back pay’s taxation:
Process the Back Pay in Payroll:
After the employer has calculated the back pay they owe and made all the necessary deductions, they will include the back pay in the next payroll processing, and it will clearly be marked as back pay on the employee’s payslip. It is advised that the employer reports the correct deducted amount of Income Tax and NICs to HMRC via RTI (Real Time Information). Last but not least, keeping accurate payroll records of the payment is also crucial.
To gain an insight into RTI, the following guides will greatly help you:
Report To HMRC And Make The Payment:
Finally, employers must report back pay via their PAYE system when processing payroll. Likewise, the RTI submissions should indicate the adjustments made for back pay. It is significant to underline that employers should pay back pay promptly to employees so they will not encounter any penalties, disputes, or compliance issues with employment laws.
Secure Streamlined Assistance From Payroll Services Accountants With Back Pay Calculations:
For businesses managing a staggering number of employees, ensuring compliance with back pay calculations and tax deductions can undoubtedly be a daunting task. Therefore, Payroll Services Accountants can carry out the task of handling your payroll in tandem with your business’s specifications. Notably, we offer expert payroll management solutions to assist employers in:
- Accurately calculating back pay for employees.
- Ensuring proper tax and NIC deductions are applied.
- Processing payroll effortlessly using HMRC-approved software.
- Submit payroll reports through RTI to remain compliant with HMRC regulations.
- Avoiding payroll disparities/discrepancies and penalties by maintaining accurate records.
Beyond that, our team comprises certified and proficient payroll accountants who strive to help businesses manage their payroll obligations efficiently, ensuring compliance with UK employment and tax laws.
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Conclusion:
In a nutshell, back pay is a substantial part of payroll compliance since it ensures that employees receive their rightful and justified earnings for past work. To this end, employers must comprehend how is back pay calculated accurately, apply the correct tax and NIC deductions, and process payments in a timely.
If you are pursuing expert support in payroll processing, Payroll Services Accountants is a trustworthy and credible choice. We provide tailored solutions to help employers manage back pay and other payroll obligations efficiently. Thus, whether you are handling back pay issues or need full payroll management services, take the first step today, and our accountants will be at your beck and call.
Disclaimer: The content contained in this blog is exclusively aimed at informational purposes and should be treated as such. While it has been written with thorough scrutiny at the time of writing to ensure every information is correct, no warranty for the acceptance of any error or inaccuracy is given. It is not a piece of absolute financial advice, nor is it expert legal advice. Hence, it is advised to consult a professional before acting upon any information stated herein.
