Most small business owners assume holiday pay is just... paying someone their normal wage when they take time off. For many employees, that is exactly right. But the rules get more complicated than that - and the mistakes employers make tend to be costly, because underpaying holiday pay counts as an unlawful deduction from wages.
This guide covers how holiday pay works in the UK, how to calculate it correctly for different types of worker, and what changed with the 2024 reforms that many employers still haven't caught up with.
What is holiday pay?
Holiday pay is the pay an employee receives while taking their statutory annual leave entitlement. All UK workers are entitled to 5.6 weeks of paid holiday per year - that is 28 days for a full-time employee working five days a week.
The key word is paid. Employees must receive their normal pay while on holiday - not just their basic salary if their actual earnings are higher than that.
For a full overview of leave entitlements, see our guide to annual leave in the UK.
The straightforward case: fixed hours, fixed pay
If an employee works the same hours every week and earns a fixed salary or hourly rate, holiday pay is simple. They receive their normal weekly pay for each week of leave they take.
For a salaried employee, their monthly pay already accounts for this - you just keep paying their salary as normal while they're off. There is nothing extra to calculate.
When it gets more complicated: variable pay
The law requires that holiday pay reflects what an employee would normally earn - not just their basic rate. This matters when employees regularly receive:
- Overtime payments
- Commission
- Bonuses linked to performance
- Shift allowances or other regular supplements
Following court rulings and changes that came into effect in January 2024, the first four weeks of statutory leave (regulation 13 leave) must be paid at the employee's normal rate of remuneration. This means regular overtime, commission, and other regular payments must be included in the calculation - not just base pay.
The way you work this out is by looking at the employee's average pay over the previous 52 weeks, excluding any weeks where no pay was received. Add up the total earnings over those 52 weeks and divide by 52 to get the average weekly pay. That average is what you use to calculate a week's holiday pay.
Part-time workers
Part-time employees are entitled to the same 5.6 weeks of paid holiday as full-time employees, but their entitlement in days is lower because they work fewer days.
Someone working three days a week is entitled to 5.6 x 3 = 16.8 days of paid holiday per year. Their daily pay rate is simply their weekly pay divided by three.
Use our holiday entitlement calculator to work out the correct entitlement for part-time employees, including those who join mid-year.
Irregular hours and zero-hours workers: the 2024 changes
This is where a lot of small employers come unstuck, and where the rules changed significantly in 2024.
For leave years starting on or after 1 April 2024, part-year and irregular-hours workers accrue statutory holiday at a rate of 12.07% of hours worked, up to a maximum of 5.6 weeks. This replaced the previous approach, which was more complicated and produced inconsistent results.
The 12.07% figure comes from the statutory entitlement itself: 5.6 weeks divided by 46.4 working weeks (52 weeks minus the 5.6 weeks of holiday entitlement) equals 12.07%.
So if a zero-hours worker works 40 hours in a given pay period, they accrue 4.83 hours of holiday entitlement (40 x 12.07%).
Rolled-up holiday pay
Since April 2024, employers can now legally use rolled-up holiday pay for irregular-hours and part-year workers. This means adding 12.07% to each payslip as a separately identified holiday pay element, rather than paying it when leave is taken.
If you use rolled-up holiday pay, it must be clearly shown as a distinct line item on the payslip - you cannot just fold it into the hourly rate without identifying it.
Holiday pay when someone leaves
When an employee leaves, they are entitled to be paid for any holiday they have accrued but not yet taken. This applies regardless of the reason for leaving - resignation, redundancy, or dismissal.
The calculation is straightforward:
- Work out how much holiday the employee has accrued during the leave year (proportional to how much of the year they have worked)
- Subtract any holiday they have already taken
- Multiply the remaining days by their daily pay rate
If you need the exact number without doing the sums by hand, our remaining leave calculator works out the balance, and our guide to unused holiday when someone leaves your business covers the payout rules in more detail.
If an employee has taken more holiday than they have accrued - which can happen if you front-load leave or allow it to be taken before it is earned - you can only deduct the excess from their final pay if your contract specifically allows this.
Common mistakes to avoid
Paying basic salary only. If an employee regularly earns more than their basic salary through overtime or commission, their holiday pay must reflect that. Paying basic only is a common and expensive error.
Ignoring bank holidays. The 28-day statutory entitlement can include bank holidays - but only if your contract says so. If you tell employees they get "20 days plus bank holidays", the bank holidays are additional to the 28-day minimum. Get this wrong and you may be underpaying.
Not keeping adequate payroll records. The 52-week averaging method requires 52 weeks of pay data. If your records are incomplete, the calculation becomes guesswork.
Keeping track without the headaches
Calculating holiday entitlements manually gets complicated quickly - especially once you have a mix of full-time, part-time, and variable-hours staff. Absently tracks each employee's leave allowance and remaining balance automatically, so you always know where things stand.
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