How to Work Out Hourly Rates of Pay for Growing Businesses in the UK

As your business expands, accurately calculating employee pay becomes all the more crucial. Understanding how to work out hourly rates is a fundamental skill for any HR manager. This guide provides clear instructions on how to calculate hourly rates and explores the various factors that influence them in the UK. Correctly calculating an hourly rate is essential for ensuring fair pay, complying with UK employment and tax law, and managing your budget effectively, saving time and avoiding errors.

What is an hourly rate and why is it important?

An hourly rate is the amount of money an employee earns for each hour they work. It is a common payment method, particularly in industries with variable work patterns. For a growing business, using hourly rates can offer flexibility in managing staffing costs, especially when dealing with part-time or temporary employees. It is also a key component in determining pay for staff on pro-rata contracts, where pay is proportional to hours worked. You can learn more about how to make pro-rata calculations in our article on what a pro-rata salary is.

How to work out an hourly rate from an annual salary

Converting a salaried employee’s pay to an hourly rate is a straightforward process, and can be particularly useful for benchmarking, and to calculate overtime pay.

Let’s say, for instance, an employee in a specific job has an annual salary of £30,000 and is contracted for a 40-hour working week. To get the weekly pay, you divide the salary by 52. Then, to calculate the hourly rate, you simply divide this figure by 40.

While you can do this manually, it is recommended that you use the a payroll calculator built into your payroll software to ensure accuracy over time.

How to work out an hourly rate from a monthly salary

For employees paid on a monthly basis, the calculation is slightly different. To account for the varying number of days in each month, it’s best to calculate the annual salary for the entire working year first, rather than using an average figure from a single pay period and converting it to 52 weeks.

Then, use the same formula as above to find the hourly rate.

Key factors affecting hourly rates in the UK

Several variables can influence how you work out hourly rates in the UK. Among these, it is important to consider:

• Job type and industry: Skilled roles and those in high-demand sectors for a particular job typically command higher hourly rates.

• Location: While there is a national minimum wage, salaries, and consequently hourly rates, can be higher in areas with a greater cost of living.

• Hours worked: The total number of hours an employee is contracted for over a working period will directly impact their hourly rate when converted from a salary.

• Business costs and profit margin: For client-facing roles, the hourly rate you pay an employee is the foundation for what you charge clients for their billable hours. You need to factor in overheads to protect your profit margin and determine a final billable hour cost.

• Overtime: When employees work more than their contracted hours, they may be entitled to a higher rate of pay. Understanding your legal obligations regarding overtime pay in the UK is essential.

• Backdated pay: If a pay rise is awarded with retrospective effect, you will need to calculate and apply this increase to hours already worked. For more details, see our explanation of what a backdated salary is.

Gross vs. net hourly rate: understanding deductions in the UK

It is vital to distinguish between gross and net hourly pay. The hourly rates calculated above represent gross pay, that is, the amount before any deductions like tax are made.

Net pay is the employee’s take-home amount after deductions. As an employer, you must make sure you consider the following when calculating a net hourly rate:

• Income tax: Deducted based on the employee’s tax code and earnings.

• National insurance contributions: Both mandatory employee and employer contributions.

• Pension contributions: Automatic enrolment in a workplace pension scheme is a legal requirement for eligible employees.

• Other deductions: These may include student loan repayments or court orders.