How to Calculate Backdated Pay Entitlement

Backdated pay


2024/25 Payroll Legislation Guide

The facts, figures, thresholds and allowances for 2024/25, in one handy guide.

Backdated pay, also known as retroactive pay, happens when your employee is owed wages from a previous period due to a payroll error, a change in pay rate, or an overlooked promotion.  
If youre a UK employer, its crucial to understand how to accurately calculate and process backdated pay to maintain compliance with employment laws (such as The Employment Rights Act 1996 and The National Minimum Wage Act 1998) and , of course, to keep your employees happy.

What is backdated pay?

Backdated pay refers to the wages that should have been paid to an employee in a prior period but were not. Common scenarios necessitating backdated pay include: 

  • Administrative errors: mistakes in payroll processing or data entry. 
  • Pay rate changes: increases in salary or hourly wage that were not applied in a timely manner. 
  • Promotions or role changes: delayed implementation of new pay rates following a change in role. 
  • Overtime or bonuses: overtime hours or performance bonuses not accounted for in the original payroll.

The legal considerations

Before calculating backdated pay, you need to be aware of the legal framework that governs wages in the UK: 

  • The Employment Rights Act 1996 stipulates that employees are entitled to receive the full amount of their wages promptly. 
  • The National Minimum Wage regulations establish the right of employees to receive their full wages without any unauthorised deductions. 
  • Contractual obligations: employment contracts may contain specific clauses related to pay adjustments and timing, which must be honoured. 

7 steps to calculate backdated pay

1. Identify the affected period 
You need to start by determining the exact dates during which your employee was underpaid. This period is crucial for calculating the precise amount owed.

2. Determine the correct pay rate  
Verify the correct pay rate that should have been applied during the affected period. This includes any base salary, hourly wage, overtime rates, bonuses, or allowances.

3. Calculate the shortfall
For each pay period within the affected timeframe, calculate the difference between what was paid and what should have been paid. 

  • For hourly employees: multiply the number of hours worked by the correct hourly rate and subtract the amount already paid.
  • For salaried employees: calculate the pro-rated amount of the correct salary and subtract the amount already paid.
  • For overtime and bonuses: factor in any additional payments that were missed.

4. Adjust for deductions 
Ensure that any necessary deductions such as tax, National Insurance contributions, and pension contributions are correctly applied to the backdated amount. 
5. Apply interest (if applicable):  
Some employment contracts or company policies may stipulate that interest be added to backdated pay to compensate for the delay. Calculate and add this if required. 

6. Communicate with your employee 
Inform your employee about the error, the calculations performed, and the amount to be paid. You should provide a detailed breakdown to ensure clarity and full transparency. 
7. Update your payroll records 
Amend your payroll records to reflect the backdated pay adjustment. This will also help prevent future discrepancies.

Let’s take a look at an example

Your hourly employee should have received a pay rise from £12 to £14 per hour starting 1st January, but the increase was not applied until 1st March.  

Your employee worked 170 hours in January and 150 hours in February. 

Affected period: 1st January to 29th February. 

Correct pay rate: £14 per hour. 

Shortfall calculation:

  • January: 170 hours x (£14 – £12) = £340 
  • February: 150 hours x (£14 – £12) = £300 

Total backdated pay: £340 + £300 = £640

This amount would then be subject to the usual deductions before being paid out to your employee.

How is backdated salary taxed in the UK?

In the UK, backdated salary is taxed based on the tax rates and allowances applicable in the tax year in which it is paid, not the year it was earned. This means it will be added to your employee’s income for the current tax year and taxed accordingly.

Best practices when it comes to backdated pay

  • Regular audits: you should periodically review your payroll processes to identify and correct errors promptly. 
  • Training: make sure your payroll staff are well-trained and up-to-date with current legislation and company policies. 
  • Clear communication: maintain open lines of communication with your employees regarding any pay changes or errors.

Choose Cintra for timely and accurate payroll

Book a demo today to see how our solution ensures accurate backdated pay calculations and punctual employee payments, every time. Don’t miss out on transforming your payroll process! 

Picture of Anthony Tete
Anthony Tete
Anthony is our Communications and Content Manager for Capture Expense and supports the Cintra brand. Beyond the world of words, Anthony is passionate about all things sports and loves attending rugby games!