An employer's guide to back pay in the UK

Paying your employees properly is about more than your finances. It’s about recognising a job well done, rewarding your people for their work, and treating employees fairly.

So when employees aren’t paid the right amount, it can deeply affect your relationship with them. Sometimes you’ll owe them back pay – and getting this sorted quickly and efficiently is critical for maintaining a healthy relationship and a clear picture of your finances.

This guide takes you through the basics: how to calculate back pay, examples of when you might need to pay it, and how to use payroll software for back pay.

What is back pay?

Back pay is the difference between what you pay an employee and what they should be paid. Paying employees less than they’re due can happen for all kinds of reasons – administrative errors in payroll or accounting, overtime that hasn’t been tracked or submitted, or delayed processing of a pay rise.

If you’ve accidentally underpaid someone, don’t let it worry you – but do get it sorted as soon as possible. Like many small business payroll tasks, managing back pay properly can help keep your team and finances on track.

How does back pay work in the UK?

If you’ve underpaid an employee for any reason, they can claim back pay. This claim must be forwarded to the team taking care of pay – whether it’s an outsourced payroll provider, accountant, or internal finance team.

Honest mistakes can happen, but checking payments carefully and ensuring accurate timesheets are submitted ahead of payroll processing can help you avoid these situations.

Are employers required to pay back pay?

Yes. If you underpay an employee (accidentally or not), you’re legally required to pay them the full amount they’re due.

Failing to pay employees with a valid back pay claim is a breach of contract. Your employees could take legal action if you owe back pay and fail to pay it.

HMRC could also penalise you for non-compliance with specific pay laws. According to the Employment Rights Act 1996, employers must pay wages on the agreed payday. If you fail to pay minimum wage to your employees you could face a fine.

How to issue back pay to employees

Once you’ve reviewed their back pay claim, you’ll need to pay your employee what they’re owed. You can do this through your normal payroll system. Check their claim against timesheets or any other evidence you keep for hours worked.

Depending on your cash position, you may not be able to pay immediately. Work with your employee to agree on a timeline for the payment. Be as transparent as you can be – and try to sort the payment as soon as possible. Your employee will likely be wondering ‘how much back pay will I get?’ – reassure them they’ll be paid what they’re due based on their contract. You’ll also need to update your payroll records to include their back pay.

How to calculate back pay

There are different ways to calculate back pay depending on whether your employees are hourly or salaried. Let’s look at calculations for both.

Hourly employees

Let’s say your employee, Callum, is paid an hourly rate of £9.

Callum was paid for 30 hours of work last week, but he actually worked 35 according to his timesheets. The additional five hours worked need to be paid at an overtime rate of £10 an hour, so the calculation looks like this:

30 x £9 = £270

5 x £10 = £50 backpay

Meaning, you’ll need to make a back payment of £50 to Callum to cover the overtime worked last week.

Salaried employees

Calculating back pay for salaried employees is a little more complicated.

Let’s say your employee, Jasmine, has an annual salary of £45,000. Jasmine worked an extra day last month, but this hasn’t been accounted for in her pay. Jasmine’s contract states that any overtime will be calculated separately and based on the employee’s annual salary.

First, we need to calculate her daily wage based on the number of working days in a year.

There are 260 working days in a year, so her daily wage is £45,000 / 260 = £173.08.

Since Jasmine worked an extra day last month, the back pay due to her is £173.08.

Examples of back pay

There are several scenarios where you may need to provide back pay. Examples include:

• A pay rise that hasn’t yet been processed by payroll. So, an employee may have been awarded a pay rise that was due to begin last month, but this hasn’t been processed in time for the latest pay run.
• Honest accounting errors. A missed digit or a mistyped name. Even a small mistake on a timesheet can mean employees are owed back pay. When you use automated payroll software, mistakes like these are far easier to prevent.
• Overtime hasn’t been recorded. If your employees’ overtime isn’t captured on their timesheets or communicated to payroll, these amounts can be overlooked.
• Failure to pay minimum wage. The National Minimum Wage is a legal requirement – if you’re not paying it, you’ll need to provide back pay for your employees. Make sure you’re checking new rates and updating your payroll system before they come into place.

Unclear on how to make deductions or submit tax on backdated pay? UK employers should work with a payroll professional or check HMRC guidance.

How to ensure back pay is included when running payroll

If you’re running a smart and automated payroll system, back pay situations should be few or non-existent.

Xero payroll software allows you to set custom rates for a wide range of pay types, so your employees are always paid what they’re owed. Send compliant reports to HMRC, and keep accurate payroll records stored securely with our cloud-based software.

And for more help with online payroll for small businesses, check out our other guides.