Annualised Salary

It’s easy to confuse annualised salary and annual income, but the two are different. 

What Is Annualised Salary?

Annualised salary is the estimated payment an employee would receive over a year should they work the full year. This projected amount is based on their earnings during shorter periods, such as weekly or monthly, including bonuses, commissions, and overtime. 

When an employee’s salary is annualised, it means they would still receive payments regularly (ie. monthly) even if their schedule is not as fixed as that of a salaried employee. 

Annualised Salary vs. Annual Salary

At a glance, it’s easy to assume that annualised salary is the same as annual salary or income. But, these two are different. 

The annual salary is the fixed, guaranteed amount a salaried employee would receive for working the full year. Their hours are often pre-agreed and consistent (ie. 8 hours a week on weekdays). 

  • For example, an employee who has an annual salary of £60,000 would receive exactly that amount over a year, usually in equal instalments (ie. monthly)

Annualised salary is the projected amount based on shorter periods (weekly, monthly, etc) but expressed in annual rate. 

  • Let’s say the company pays £20 per hour to their part-time employees who typically work 15 hours per week. To “annualize” their salary, the employer should multiply their hourly rate by the number of hours they are expected to work for the year. 

Annualised Salary vs Annualised Compensation

Note that annualised salary is different from annualised compensation. The first only includes the base pay, while the latter includes the base pay plus other benefits, such as retirement plans, health insurance, subsidised child care, and paid time off. 

When is Annualised Salary Used?

There are several instances when an annualised salary is used. 

Employers might opt for it when they have part-timers or hourly employees but would still like to pay them regularly. It’s also used for employees who start or leave a salaried position midway through the year. 

Annualised salary is also useful if you have employees who wouldn’t work the full year but you would still like to pay them in the months they are not working. For example, some teaching positions may only require the personnel to work for 10 months. Annualizing their salary means they would still receive payment in the two months they are not working. 

In the retail industry, annualizing the salary can help account for more workload during peak or busy seasons; in the hospitality industry, it can help account for the fluctuations in demands throughout the year.  

The Benefits Of Annualised Salary

Annualised salary gives employers an insight into the cost of employment. It can help them make their budget for salaries, particularly when they have employees who work on and off. The regularity also allows organisations to better facilitate taxes and other deductions, such as insurance premiums and other benefits. 

For employees, an annualised salary gives a clear representation of how much they would make in a year. The regular salary also provides stability, even on the periods they are not working. 

How to Calculate Annualised Salary

To compute an employee’s annualised salary, the first step is to determine the reference period (hours, weeks, etc.) the employee is expected to work within the year. Next is to determine their rate. Finally, multiply their rate by the projected period they would be working in a year. 

For example, an hourly employee is expected to work 20 hours per week at a rate of £20. In the coming year, you only project them to work for 45 weeks. To calculate their annualised salary:

  1. Determine the number of hours they would work for the year. 
  • 20 hours x 45 weeks = 900 hours 
  1. Multiply their rate by the hours they would work for the year
  • £20 x 900 hours = £18,000 - this is their annualised salary. 

If your company pays monthly, then your hourly employee would receive £1,500 per month. 

Note that this is just an example and doesn’t take into account taxes, benefits, bonuses, overtime, or commissions. 

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