Hourly Rate

This article looks at the different ways to calculate your hourly rate. We'll also discuss the pros and cons of each method so you can make the best decision for your business.

What is an hourly rate?

An hourly rate is the amount an employee is paid for each hour they work. Unlike salaried employees, who receive a fixed amount regardless of hours, hourly workers are paid based on the actual time spent on the job.

This arrangement is common in industries like retail, hospitality, and construction where hours vary week to week.

Why does it matter?

For employers, setting the right hourly rate is key to:
✔ Staying compliant with minimum wage laws.
✔ Managing labour costs effectively.
✔ Ensuring fair pay that attracts and retains talent.

How to calculate hourly rate?

Getting the hourly rate right matters for payroll accuracy, budgeting, and compliance. Here are the three most common methods.

From an annual salary

Use this formula to convert a full-time salary into an hourly rate:

Hourly rate = Annual salary ÷ Total hours worked per year

👉 Example: An employee earns £30,000 per year and works 37.5 hours per week (UK standard full-time).

• Total hours per year: 37.5 × 52 = 1,950 hours

• Hourly rate: £30,000 ÷ 1,950 = £15.38 per hour

From a weekly salary

Hourly rate = Weekly salary ÷ Hours worked per week

👉 Example: An employee earns £500 per week and works 37.5 hours. Their hourly rate is £500 ÷ 37.5 = £13.33 per hour.

For hourly workers (calculating weekly pay)

Weekly pay = Hourly rate × Hours worked

👉 Example: An employee earns £13 per hour and works 40 hours. Their weekly pay is £13 × 40 = £520.

If they work beyond their contracted hours, overtime rules may apply.

Overtime pay

UK overtime example: An employee earns £15 per hour and works 45 hours. For the 5 overtime hours, the employer chooses to pay 1.5×:

• Overtime rate: £15 × 1.5 = £22.50/hr

• Overtime pay: 5 × £22.50 = £112.50

• Total weekly pay: (40 × £15) + £112.50 = £712.50

Quick reference table:

What does the hourly rate include?

An hourly rate is simply the gross pay per hour; what the employee earns before deductions like income tax and National Insurance. It does not include employer costs.

When budgeting for an hourly worker, employers need to account for costs on top of the hourly rate:

• Employer National Insurance Contributions: 15% on earnings above the secondary threshold 

• Pension contributions: Minimum 3% employer contribution under auto-enrolment

• Holiday pay: Workers are entitled to 5.6 weeks' paid holiday per year

• Sick pay and other statutory entitlements: Statutory Sick Pay (SSP) and other entitlements may apply

The hourly rate is what you agree and communicate to the employee. Total employment cost is higher; typically 20–30% above the stated hourly rate once employer NI and pension are factored in.

How to work out hourly rate from salary

If you're converting an annual salary to an hourly rate for payroll, budgeting, or overtime purposes, here's the full process.

1. The basic formula

Hourly rate = Annual salary ÷ Total working hours in year

The total depends on:

• Standard weekly hours (37.5 or 40 hours in the UK)

• Whether paid holidays are included

• How many weeks constitute a full working year

2. Step-by-step calculation

Scenario 1 — UK standard (37.5-hour week)

Employee earns £35,000/year:

• Total hours: 37.5 × 52 = 1,950 hours

• Hourly rate: £35,000 ÷ 1,950 = £17.95/hr

Scenario 2 — 40-hour week

Employee earns £35,000/year:

• Total hours: 40 × 52 = 2,080 hours

• Hourly rate: £35,000 ÷ 2,080 = £16.83/hr

3. Adjusting for paid holidays

If an employee takes 4 weeks' paid leave, they work 48 weeks rather than 52. Adjust as follows:

• Total hours: 37.5 × 48 = 1,800 hours

• Hourly rate: £35,000 ÷ 1,800 = £19.44/hr

This gives a more accurate picture of the actual cost per productive hour.

4. Salary-to-hourly rate reference table

5. Employer costs to factor in

The hourly rate is what the employee receives. As an employer, your total cost per hour is higher:

• Employer NI: 15% on earnings above £5,000/year (2025/26)

• US payroll taxes: 6.2% Social Security + 1.45% Medicare

• Pension: 3% minimum employer contribution (UK auto-enrolment)

• Overtime and bonuses: Factor in separately where applicable

6. When to review hourly rates

• When an employee works beyond contracted hours (overtime rules apply)

• At annual pay reviews

• When market wages in your sector increase, particularly relevant in hospitality and retail, where competition for staff is high

How to work out hourly rate in the UK

Working out an hourly rate in the UK involves two things: the calculation method and compliance with minimum wage law.

UK minimum wage rates (2025/26)

Employers must ensure every hourly rate meets or exceeds the following:

Rates correct from April 2025. Always check the current rates at gov.uk before setting pay.

Method 1 — Annual salary to hourly rate

1. Identify the annual salary (e.g. £30,000)

2. Calculate annual hours: 37.5 hrs/week × 52 weeks = 1,950 hours

3. Divide: £30,000 ÷ 1,950 = £15.38/hr

Method 2 — Weekly salary to hourly rate

1. Identify the weekly salary (e.g. £500)

2. Divide by weekly hours: £500 ÷ 37.5 = £13.33/hr

A note on zero-hours and variable-hours workers

In hospitality and retail, many workers are on zero-hours contracts or have variable hours. For these workers, the hourly rate stays fixed, but weekly pay fluctuates based on hours worked. Tracking actual hours accurately is essential both for payroll and for demonstrating minimum wage compliance. Tools like time tracking software make this straightforward, automatically logging hours and calculating pay per period.

Managing hourly pay with Shiftbase

For businesses with hourly workers across multiple sites or shifts (common in hospitality and retail) tracking hours and calculating pay manually is error-prone. Shiftbase connects employee scheduling and time tracking so that hours are logged automatically and payroll figures are ready at the end of each period. No manual calculations, no compliance gaps.