How to calculate pro rata salary for small business owners
How to calculate pro rata salary for small business owners
No matter the type, every growing business throughout the world needs to hire employees as it scales.
But, small businesses often operate on a tight budget and need to get creative when it comes to costs. This is due to various factors including startup costs, loan repayments, upfront growth marketing efforts, and much more.
So what happens when you reach the point of needing to hire and employ someone for the first time? Since labour costs alone can account for up to 70% of total business costs, it’s important to understand how to scale without breaking the bank.
One of the best ways to limit your expenses and still pay your staff a fair wage is by hiring part-time employees and calculating their pay on a pro-rata basis.
In this article, we’ll show you how to calculate pro-rata salary, holidays, and benefits for your part-time salaried employees.
We’ll also help you decide if hiring part-time is right for your business.
Table of contents
- What is pro rata salary?
- How to calculate pro rata salary
- How to calculate pro rata holiday
- How paying a pro-rata salary affects benefits
- Is hiring part-time right for your business?
- Wrapping up
What is pro rata salary?
The definition of pro rata is to distribute something in proportion to the amount or size of something. The adverb is a Latin term which translates to “in proportion” or “proportional rate”.
When pay is prorated it is distributed to part-time employees based on the number of hours they work. It is proportional to the amount they would have earned if they worked full-time.
Before we can dive into pro-rata pay calculation, we need to understand who qualifies for it.
There are generally two types of salaried employees in a company:
- Full-time employees
- Part-time employees
Full-time employees are salaried employees who are paid a certain amount per annum (i.e. a full-time salary) instead of on an hourly basis.
Part-time employees are also salaried employees, but the amount they receive is proportional to the hours they work.
In other words, they receive a pro rata salary.
Pro-rata salaries are paid to part-time employees who work less hours than a full-time employee.
Other hiring options include independent contractors, such as freelancers, and temporary employees hired for a specific period of time. These other types of workers do not qualify for pro-rata pay and therefore don’t need to be considered while reading this article. However, these types of workers do still need to understand the rules and regulations of the tax that applies to them.
Top Tip: You can learn more in our simple guide to IR35 📄
How to calculate pro rata salary
Before you begin to calculate a pro-rata salary, you need to know the exact amount a part-time employee’s salary would be if they worked full-time.
You also need to know the total amount of hours the part-time employee will be working. This ultimately depends on your budget and the type of work the employee will be doing.
For example, the full-time pay of a manager would likely be higher than the full-time pay of an assistant manager. In this case, you’d ideally want to hire a part-time manager for fewer hours than a part-time executive, to save money in the long run.
Once you have this information, follow the steps below to calculate pro rata salary:
- Divide the full-time annual salary by 52 (number of weeks)
- Divide the result by 40 (standard full-time weekly hours) to get the hourly rate
- Multiply the hourly rate by the number of actual work hours per week
- Multiply this by 52 to get the annual pro rata salary
Pro rata salary example
Let’s say a full-time employee has an annual salary of £30,000 for a 40-hour week.
We need to calculate the pro rata salary of a part-time employee who works 25 hours a week.
Pro rata calculation
First, divide £30,000 / 52 to get the weekly salary, which is £576.9.
Next, divide £576.9 / 40 to get the hourly rate, which is £14.4.
To find out the weekly pro rata salary, multiply the hourly rate by the actual work hours: £14.4 x 25 = £360.5.
To calculate the annual pro rata salary, multiply the weekly pro rata salary by the total number of weeks: £360.5 x 52 = £18,750.
Other methods to calculate pro rata salary
You can also use this simple formula to calculate an annual pro rata salary:
Annual salary / full-time hours x actual work hours
If you would rather skip the math, this salary calculator can help you work out exactly what you need to pay your employees.
How to calculate pro rata holiday
According to the UK Government, part-time workers should get the same treatment for not only pay rates, but also pensions, holidays, promotions, transfers, and more. Violating these regulations can get you into legal trouble.
In this section, we’ll show you how to calculate pro rata holidays for part-time employees.
Before we begin, it’s important to note that almost all workers in the UK are legally entitled to 5.6 weeks or 28 days of paid holidays a year. This is commonly known as annual leave or statutory leave entitlement.
To work out pro rata holidays, we’ll use a 5.6 multiplier—simply multiply the number of days an employee works per week with 5.6.
Consider this example.
A full-time worker who works 5 days a week will be entitled to 28 days of paid leave (5 x 5.6).
To calculate the holiday entitlement of a part-time employee who works 3 days a week, simply multiply the number of days they work each week by 5.6.
The result is 16.8 days (3 x 5.6).
For ease of timekeeping purposes, you can round off to the nearest whole number. In this case, the employee will be given 17 paid holidays.
You can also use this holiday entitlement calculator for your employees
Top Tip: The minimum holiday entitlement for full-time workers may or may not include bank holidays. This depends entirely on company policy. For employers and employees alike, you can learn more about the rules and regulations regarding time off in the UK in our guide to annual leave: how to calculate it and how to create an annual leave policy 📅
How paying a pro-rata salary affects benefits
Along with pay rates and holidays, part-time employees are also entitled to the same benefits as full-time employees proportionate to the number of hours they work.
For example, if a full-time employee is entitled to 5 weeks of sick leave, a part-time worker who works half the number of hours would be entitled to 2.5 weeks.
Business owners can, however, treat part-time workers differently, but only if they have a good reason for doing so. This is called ‘objective justification’.
For instance, a part-time employee may not be given health insurance on the grounds that the costs involved are disproportionate to the benefits they are entitled to.
In this scenario, if you do want to offer health insurance, a possible solution would be to share the cost of health insurance costs between your company and the part-time employee.
Is hiring part-time right for your business?
Hiring part-time employees on a pro rata basis can help you cut down on costs, but is it ideal for your business? Let’s take a look at some advantages and disadvantages of hiring part-time.
Advantages of hiring part-time employees
One of the biggest benefits of hiring part-time employees is reduced payroll costs. When you decide to pay your employees on an hourly basis, you’re effectively saving money by not paying them for any time they may not be productively working.
Since part-time workers receive benefits proportional to the hours they work, businesses are ultimately required to spend less on benefits as compared to full-time employees, which further reduces your payroll costs.
Part-time employees also offer businesses more flexibility in terms of work hours. For example, you can hire part-time workers to fill in for weekends, evening hours, or festive holidays.
Another key benefit of hiring part-time is that you can acquire the services of skilled employees on a budget. For example, if you’re having trouble attracting a skilled full-time employee, you may have more luck hiring top talent on a part-time basis. This proficient part-time employee may be able to provide the same or even more value than an average full time one, for a reduced cost.
Top Tip: Even if your business is small, processing payroll for both full-time and part-time employees can sometimes seem like a lengthy and complicated process. Learn what’s involved in payroll processing and what you need to consider in our guide to processing payroll and paying employees on time 🔎
Disadvantages of hiring part-time employees
One of the biggest downsides to hiring part-time employees is that they are at a higher risk of being less committed to your organisation, which can lead to higher turnover rates.
Higher turnover rates can be extremely costly for businesses. In fact, the average turnover cost for an employee in the UK is £12,000.
Another disadvantage of hiring part-time is cohesion amongst your team. If you employ both full time and part-time employees, this could cause a natural divide and make it more difficult to bond as a team.
A good way to combat this possibility is by scheduling regular meetings or social events where both parties are present. This helps them interact with each other via team building activities that work to minimise misunderstandings.
Top Tip: A strong business culture helps you attract the best talent and gain a competitive advantage. To help you create a purposeful and meaningful environment for employees (that in turn drives performance), take a look at our guide to building a happy business culture from the start 😃
For small business owners, hiring part-time employees on a pro-rata basis is an ideal way to cut down on costs and save money.
However, it comes with its own set of challenges.
Just make sure you remember to properly calculate pro-rata pay, holidays, and benefits as it can help you stay out of legal trouble.
Ready to start doing what you love? With Tide, you can register your company for free (we pay the £12 incorporation fee for you). What’s more, we’ll open a free business bank account for you to help you manage your small business’ finances more efficiently.
Photo by Ketut Subiyanto, published on Pexels