Blog>Trade>Finance>What is back pay?
Last updated: 28 June 2024
What is back pay?
For people newer to running their own trade business, back pay is what you owe someone who has worked for you but you haven't yet paid. Our handy guide explains what it is and how to calculate back pay.
Pay can be a tricky issue for any employer, especially for those newer to running their own business. Our guide below outlines what is back pay helps employers make the right adjustments.
A back pay calculation may be necessary due to a mistake. Back dating pay could be contentious if you sack an employee. There's also tax on back pay that you'll need to consider.
The best way to handle the calculation is to act quickly to resolve it. That should give the best outcome for both you and your staff.
What is back pay?
Quite simple, it is an amount you owe someone who has worked for you but you haven’t yet paid.
Your wage bill is probably a major trade business cost. That means getting to grips with back dating pay is essential.
Back pay can relate to:
Hourly and daily wages
Monthly salaries
Bonuses on jobs
Commissions on jobs
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Keeping up with how many hours employees work is fundamental here. A time-tracking app is a great way to do this.
How an employee time tracking app boosts business
In our digital age, an employee time tracking app is a must-have for many trades. Medium to larger trade businesses tend to rely on software like this more and more. You can see why. Where you’ve got lots of employees working on many different projects, a time tracking app for employees is
Reasons for needing a back pay calculation
Overlooking wage-related processes can cause back pay issues. There are lots of reasons why this might happen. Here are some of them:
Human error
We all make mistakes from time to time. Working out staff pay is complicated, so errors can creep in.
If a mistake goes unnoticed then it is easy for unpaid wages to build up. That could create a financial headache for your trade business.
Accounting error
The way you calculate pay could be wrong. This is when an accounting error crops up.
For example, paying an employee hourly wages instead of a monthly salary. Make sure your accounting system has the correct information.
Delay in receiving a pay rise
A pay rise is usually effective from the date you tell an employee. If there is a delay in changing their pay rate then back pay could build up.
Alternatively, you could give someone a pay rise and say you'll backdate it. That also counts.
Wrongful dismissal
This is a very sensitive area. If you choose to let an employee go, naturally you stop paying their wages or salary.
However, in the case of wrongful dismissal they could be owed back pay. If they are successful, it would need to be calculated to the day the person was let go.
If employment disputes happen it’s best to seek outside advice to resolve them. ACAS, the Advisory, Conciliation and Arbitration Service), can help both employers and employees.
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Employee prevented from completing work
Another type of personal issue is if an employee is taken off a job mid-way through. There are a number of reasons for this, such as changing scope of a project, or disagreement.
As an employer, you would have to decide if it was their fault they couldn’t continue on that job. They may still be entitled to the wages.
Paying less than the minimum wage
If you pay an employee less than the minimum wage, you could owe them back pay. Make sure you keep up with the latest rules on paying the minimum wage.
Businesses face fines for paying less than the minimum wage.
Unpaid overtime
In a busy trade business, employees might work longer hours than agreed to get jobs done. Having an agreed overtime rate is important here.
Once you’ve agreed overtime rates, remember to pay what you owe on time. Back dating pay can happen if you delay making overtime payments.
However, sometimes you can't help paying late. You might have to wait until a job is finished before you can work out any overtime earned by your employees.
How to calculate back pay
The way to make a calculation is to multiply the extra hours or days worked by the rate of pay. How you pay employees is down to you. But always remember to be consistent and keep on top of things.
Overtime example
In this case, an employee earns £1,000 per month. A four-week month is £250 per week or £50 per day.
They work one day’s overtime, so their back pay is £50. If you pay 1.5 times the usual rate for overtime, then the amount due is £50 x 1.5 = £75.
Backdated pay rise example
If you backdate a pay rise then you’ll need to work out the amount that you owe them since the change.
Here, you increase a daily rate from £100 to £110 per day but delay introducing the pay rise for 15 days.
Back pay is the pay rise (£10 per day) multiplied by the number of days (15) when you didn't pay it. In this case, you owe £150 in back pay.
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What is back pay on a payslip?
All relevant information should appear on a person’s payslip. This shows them how much you have paid and how it was calculated.
This includes any amount due to unpaid wages that are being reimbursed.
What is the tax on back pay?
Calculate tax and National Insurance apply in the same way as for usual wages and salaries. The same Pay As You Earn (PAYE) rules apply for tax on back pay.
Remember to pay tax on at the rate according to the tax year when the money was earned. The tax year runs to 5 April each year.
It could be that in June you realise you still owe someone pay relating to work done in February. The tax relates to the previous tax year, not the current tax year.
This could be important if tax rates change between tax years.
What business taxes do I have to pay as a tradesperson?
Business taxes definition When you are running your own trade business, you'll want to know: "How much does a small business have to make before paying taxes?". After that, you'll need to ask yourself: "What small business taxes do I have to pay?'. Knowing the business taxes definition helps you
How to avoid back pay calculation issues
As we’ve said, many problems relating to pay are down to simple errors. Here are some ways you can avoid back pay issues:
Make sure pay calculations are correct and accurate
Improve your bookkeeping
Use the services of an accountant for your payroll
Keep your business records information up to date
Use payroll software
Act immediately if issues arise to avoid build-up of money you might owe
Scale up your trade business
Back pay can mean you’re busier than planned. Paying overtime and bonuses are often signs of a successful trade business. If that’s the case, you’ll want to keep the momentum going.
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They include:
Dedicated membership advice team
Work guarantee up to £1,000
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What do you need to become Checkatrade approved?
Becoming a Checkatrade member comes with a whole host of benefits, but the biggest has to be gaining our seal of approval. Homeowners tend to expect a commitment to quality when it comes to the Checkatrade tick, which can help you to win more business. Here are the checks you'll need to pass to join our directory.
Key takeaways
Human and accounting errors can lead to unpaid wages
Back pay could be owed if an employee was unfairly dismissed
Tax is due on back pay in the same way as normal wages and salaries
Keep accurate and up-to-date business records to avoid mistakes paying wages and salaries
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