What does pro-rata mean?

What is pro rata?

According to Investopedia, pro rata means to do something proportionally; or in proportion to the whole lump. For example, if holiday bonuses are to be given to employees, it is most often done proportional to their input into the company or proportional to their salary. 

In other words, pro-rata is used when something is to be proportional to something such that everybody gets what they deserve, their fair share of the lump. 

The term pro-rata is often used in legal and financial terms and details will be discussed in the following subheading.

What is pro-rata used for?

Here are a few examples of instances where pro-rata is used.

• Allocation of dividends to shareholders – shareholders get dividends based on how many shares they have in the company and this applies to the public or private shareholders the same way.
• Taxable income – pro-rata is used to calculate the taxable income for individuals such as salary earners, pensioners, business owners, etc. for example, how much tax you pay depends on how much you earn – personal allowance, so that everyone pays as much tax as they are due.
• Partnership liability – the liability of each partner in a general or limited liability partnership is prorated according to their initial starting contribution.
• When filing for bankruptcy – it is recognised by the law for a legal counsel to get creditors to agree to get a prorated amount to how much they are owed whenever a company files for bankruptcy. That way, the creditor that is owed the most gets the largest share of the money remaining in the company’s coffers.
• Banking interest rates – the bank calculates how much interest they give to each customer proportional to the amount deposited per month or year by the customer.
• Risk and premium benefits in insurance – insurance companies calculate the risks an individual should bare when there is one or more person involved in an accident. They can also base how much they pay in insurance proportional to the risk to be undertaken. Premium benefits of insurance are also a function of pro rata in proportion to certain criteria to be met by the client.

There are more applications of pro rata in law, colleges, banking, insurance, investments, venture capital, etc. 

How to calculate pro-rata?

There are more complicated pro-rata calculations but we will endeavour to give a simplified version here for your everyday use.

Examples

1. You changed employers in the middle of the month and you need to know how much your former employer owes you. If your salary per month is £1200 and you left for another job on the 15^th of January, 2023. Taking the number of working days in January 2021 to be 22, the prorated amount = £1200/22 = £54.54 per day. The prorated amount owed you can therefore be £54.54 x 12 = £654.48.

You can also do this for the number of hours you should normally log per month.

1. To calculate how much dividends you are owed as a shareholder, you need to know how many shares the company sold that year and the cost of each. So, if a company has 1500 shares, wants to pay a dividend of £1 per share, and you bought 30 shares. The total amount to be paid out is £1500. Then, the prorated amount per share is = £1500/1500 shares = £1. Your prorated dividends are therefore £1 x 30 shares = £30.

Holiday entitlements

Full-time employees get holiday entitlements – days when they are on leave. This can be done for part-time workers too. This section teaches you how to do this effectively.

First, you should know that every worker in the UK is allowed 5.6 times the number of days of paid holiday per year. Therefore, a full-time worker working 5 days a week will get 28 working days of paid holiday every year.

Now, you can either calculate the prorated holiday entitlement by days or hours.

• Calculation by days – if you work 3 days a week, simply multiply 5.6 by 3 and you get the number of days you should have for the holiday. In this case, you are entitled to 15.8 working days of holiday.
• Calculation by hours – if you log your records per hour, then you can make calculations by hours, although it gets a bit more complicated. A full-time worker should work about 40 hours a week in the UK (this depends on the job and employer). So, converting 5.6 weeks to hours equals 28 days x 8 = 224 hours. Therefore, you can calculate your prorated holiday hours thus, If you worked 25 hours per week for 5 hours per day, then your prorated working day will be = hours worked per week/days worked per week = 25/5 = 5 hours per week. Therefore, your prorated holiday entitlement will be 28 x 5 = 140 hours = 5.8 days. Alternatively, you can use the official holiday calculator of the UK government to simply know how many days you are entitled to have a holiday in a year here.

Conclusion

Making payments or decisions on a pro-rata basis allows for things to be done fairly and without injustice. Having a good understanding of how it is done enables you to deal justly with your employees or know if your employer is being just with you.