Back pay is unpaid or underpaid wages owed to an employee for work already completed. Back pay in the UK arises when an employer pays less than the contractual rate, statutory entitlement, or agreed salary, creating a shortfall between expected earnings and actual payment.
Common causes include payroll errors, unlawful deduction of wages, miscalculated holiday pay, failure to apply National Minimum Wage rates set by HM Revenue & Customs, or delayed salary increases.
UK employers are legally required to correct back pay under the Employment Rights Act 1996, and failure to do so may result in enforcement action by HM Revenue & Customs or claims before an Employment Tribunal.
Back pay for wage compliance, contractual disputes, or statutory underpayment protects employees’ earnings and ensures payroll accuracy for businesses of all sizes.
What Does It Mean to Get Back Pay?
Getting back pay means receiving wages that were owed to you from a previous pay period but were not paid at the time. Think of it as settling a debt your employer has with you.
This can happen for several reasons. Your employer may have made a payroll error, your pay rise may have been agreed but not processed in time, or you may have been underpaid for overtime or holiday pay. In some cases, it can result from a change in the National Minimum Wage rates that was not immediately applied to your pay.
For a business owner, it works the other way around. If you discover you have underpaid a member of staff, even unintentionally, you are legally required to make up the difference. Failing to do so can lead to an employment tribunal claim and, in some cases, HMRC enforcement action.
What is Back Pay Salary? How is It Different From Regular Pay?
Back pay is not a bonus or a gift. It is simply overdue salary. The key difference between back pay and regular pay is the time element, back pay relates to money earned in a past period that has not yet been settled.
For example, if an employee was entitled to a 5% pay rise from 1 January but you did not update the payroll until 1 March, the difference between their old rate and new rate for those two months would be owed as back pay.
Here is another common scenario: if you employed someone at £11 per hour when the National Minimum Wage was £11.44 per hour (the adult rate from April 2024), you would owe the £0.44 per hour shortfall as back pay for every hour worked at the incorrect rate.
Is Back Pay Taxed the Same as Normal Pay?
Yes. Back pay is treated as earnings and is subject to the same deductions as regular salary. That means:
- Income Tax is applied via PAYE (Pay As You Earn) through your payroll
- National Insurance Contributions (NICs) are due from both the employer and employee
- Student loan deductions apply if the employee is in repayment
The back pay should be processed through your payroll software in the same way as normal wages. HMRC expects this to be reported accurately on your Full Payment Submission (FPS).
How is Back Pay Calculated?
Calculating back pay is not complicated once you know what you are looking for. The basic formula is:
Back Pay = (Correct Rate – Actual Rate Paid) × Hours or Days Worked
Let’s break this down with a practical example.
Suppose your employee was entitled to £13.00 per hour but was paid £12.00 per hour by mistake. The error ran for 8 weeks and they worked 37.5 hours per week.
- Underpayment per hour: £1.00
- Hours worked: 8 weeks × 37.5 = 300 hours
- Total back pay owed: £1.00 × 300 = £300
You would then run this £300 through your payroll, deducting income tax and NICs as normal before the employee receives the net amount.
What About Back Pay for Holiday or Overtime?
If an employee was underpaid for holiday pay or overtime, the calculation follows the same principle, but you need to base it on their correct average earnings, not just their basic pay. Under the Working Time Regulations 1998, holiday pay must reflect normal remuneration, including regular overtime and commission where applicable.
This is an area where many small businesses make errors. If your staff regularly work overtime, their holiday pay should reflect that not just their basic hourly rate.
What are the Most Common Reasons Employers Owe Back Pay?
Understanding why back pay arises in the first place can help you avoid it. The most frequent causes include:
Delayed pay rises. If a pay increase was agreed verbally or in writing but not processed on time, the difference from the agreed start date to the date it was applied is owed as back pay.
Payroll errors. Simple mistakes, wrong hours entered, old pay rates left on the system, missed shift allowances, are more common than most employers expect, especially when payroll is handled manually.
National Minimum Wage increases. Every April, the National Minimum Wage (NMW) and National Living Wage (NLW) rates change. Employers who do not update their payroll immediately could find themselves underpaying staff from day one.
Incorrect classification of workers. If someone is treated as self-employed but is later found to have employee status, they may be entitled to back pay at NMW rates along with other employment rights.
Unlawful deductions. If you have made deductions from an employee’s wages that were not legally permitted or agreed in writing, the employee can claim those amounts back.
Can I Get Back Pay If I Resign?
This is one of the most frequently asked questions from employees and the answer is yes, in most cases.
Resigning from a job does not cancel any wages you are legally owed. If you were underpaid during your employment, you can still make a claim for that money even after you have left the company.
Here is what you need to know:
The time limit matters. In the UK, you generally have two years from the date the deduction was made to bring an employment tribunal claim for unlawful deduction of wages. If the underpayments are ongoing or connected, a series of deductions can be treated as one continuing act, which may extend how far back you can claim.
How to claim. If raising it directly with your former employer does not resolve the issue, you can contact ACAS to start early conciliation before taking the case to an employment tribunal.
For National Minimum Wage violations, you can also report the employer to HMRC, which has the power to investigate and enforce payment.
For business owners reading this. If a former employee comes forward with an underpayment claim after they have left, you should take it seriously and seek advice promptly. These claims are taken seriously by employment tribunals, and defending them without proper payroll records is difficult.
What Happens If an Employer Refuses to Pay Back Pay?
If you are an employee and your employer refuses to pay wages you are owed, you have several options:
You can raise a formal grievance with your employer as a first step. If that does not work, ACAS early conciliation is the required next step before an employment tribunal claim. For NMW violations specifically, HMRC can step in, investigate, and force repayment plus charge penalties to the employer.
For employers, refusing to pay legitimate back pay is not a good position to be in. Tribunal awards can include the original amount owed plus interest, and in serious cases, the company name can be published on HMRC’s naming and shaming list for National Minimum Wage non-compliance.
How Should Employers Handle Back Pay in Their Payroll?
If you realise you have underpaid a member of staff, here is the practical process to follow:
Step 1: Calculate the exact amount owed. Go back to when the error started and work out the difference between what was paid and what should have been paid for each pay period.
Step 2: Process it through payroll. Do not pay back pay in cash or outside of your payroll system. Run it through your payroll software so that the correct tax and NICs are deducted and reported to HMRC via your FPS.
Step 3: Inform the employee. Be transparent. Let them know what happened, how much they are owed, and when they will receive it. A written explanation helps avoid disputes.
Step 4: Check your payroll processes. One error often signals a wider issue. Check whether other employees are affected and put safeguards in place to prevent the same problem happening again.
Is There a Statute of Limitations on Back Pay Claims in the UK?
Yes. The rules depend on the type of claim:
For unlawful deduction of wages, employees have two years from the date of the deduction (or the last in a series of deductions) to bring a claim to an employment tribunal.
For breach of contract claims, the limitation period is six years in the civil courts though employment tribunals have a three-month limit from the date of termination for breach of contract claims relating to employment.
For National Minimum Wage enforcement by HMRC, there is no formal limitation period for HMRC investigations, though their standard approach focuses on the six years prior to the investigation.
Does Back Pay Affect Employee Benefits or Tax Credits?
It can. A lump sum of back pay can push an employee into a higher income bracket for that tax year, which might affect:
- Their Income Tax band for the year
- Eligibility for Universal Credit or Working Tax Credit
- Student loan repayment thresholds
- Pension contributions if your scheme is based on earnings
It is worth flagging this to employees when you make a back pay payment, especially if the amount is significant. While the tax position generally balances out at the end of the year through Self Assessment or PAYE reconciliation, a large payment in one month can create a temporary cash flow impact for the employee.
What Records Should You Keep as an Employer?
Under HMRC rules, you are required to keep payroll records for at least three years after the tax year they relate to. For National Minimum Wage purposes, you should keep records that show you have paid at least the NMW for at least six years.
Good records are your best protection if a back pay dispute arises. You should be able to show:
- The hours worked by each employee
- The rate of pay applied in each period
- Any agreed changes to pay rates and the date they were to take effect
- All payslips and payroll submissions made to HMRC
If you are using payroll software, make sure your settings are updated every time there is a pay rise or a change in NMW rates, and always keep a backup of your payroll data.
Quick Summary of Back Pay in the UK at a Glance
Back pay is money owed to an employee for work they have already done but were not correctly paid for at the time. It arises most often from payroll errors, delayed pay rises, or NMW rate changes. It must be processed through payroll in the same way as regular wages, with the correct tax and NICs deductions applied.
Employees can claim back pay even after they have resigned, and the general time limit for tribunal claims is two years from the date of the underpayment. Employers who refuse to pay legitimate claims face tribunal action, HMRC enforcement, and potential public naming for NMW violations.
If you are not sure whether your payroll is accurate, or if you have received a back pay claim from a current or former employee, it is worth speaking to an accountant who understands UK employment and payroll rules.
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Disclaimer: The content on MicroEntityAccounts is for informational purposes only and do not constitute tax or financial advice. We recommend consulting a certified tax professional or the HM Revenue and Customs Dept (HMRC) for accurate guidance. MicroEntityAccounts is not responsible for any decisions made based on the information provided.