Holiday Entitlement and Holiday Pay

Every worker in the UK is entitled to paid annual leave under the Working Time Regulations 1998. The statutory minimum is 5.6 weeks per year for full-time workers, which equals 28 days including bank holidays (unless the employment contract provides more).

Statutory Holiday Entitlement

The 28-day entitlement is the legal maximum that an employer must provide by statute. Employers can offer more, but never less. There is no statutory right to extra holiday for long service.

Bank Holidays

There is no automatic right to have bank holidays off. Employers can include the 8 usual bank holidays within the 28-day entitlement. The employment contract should state whether bank holidays are included in or additional to the statutory minimum.

Calculating Entitlement for Part-Time Workers

Part-time workers receive a pro-rated entitlement based on the number of days they work per week:

The formula is: days worked per week × 5.6 = annual holiday entitlement in days.

Holiday Accrual

Holiday entitlement accrues from the first day of employment. In the first year, the standard accrual rate is one-twelfth of the annual entitlement for each complete month of employment.

Accrual Example

An employee starting on 1 July with a holiday year running January to December:

After the first year, the full 28-day entitlement is available from the start of each holiday year.

Irregular Hours and Part-Year Workers

Since 1 January 2024, employers can use the accrual method for workers with irregular hours or those who work only part of the year (such as term-time workers or seasonal staff):

• Entitlement accrues at 12.07% of hours worked in each pay period
• This replaces the previous complex calculation under the Working Time Regulations
• Holiday pay for these workers is calculated as 1/52nd of the pay received in the previous 52-week reference period (ignoring weeks with no pay)

Holiday Pay

What Counts as Holiday Pay

Holiday pay must reflect what the worker would normally earn if they were at work. Following case law (particularly British Gas v Lock and the Harpur Trust v Brazel decisions), holiday pay includes:

• Basic salary
• Regular overtime (guaranteed and regularly worked non-guaranteed overtime)
• Commission regularly earned
• Regular allowances and supplements
• Regular bonus payments

Calculating Holiday Pay

For workers with fixed hours and pay, holiday pay is simply their normal weekly or daily rate.

For workers with variable pay, employers must calculate the average pay over the 52-week reference period ending with the last complete pay period before the holiday. Weeks in which no pay was received are skipped, and the reference period extends back up to 104 weeks to find 52 paid weeks.

Carrying Over Holiday

Basic Rules

The Working Time Regulations allow employers to set rules about carrying over unused holiday:

Sickness and Family Leave

If a worker is unable to take holiday because of long-term sickness, they can carry over up to 4 weeks of untaken leave into the following year. This carried-over leave must be used within 18 months of the end of the leave year in which it accrued.

Holiday continues to accrue during statutory maternity pay periods, paternity leave and statutory sick pay periods.

Payment in Lieu of Holiday

Employers cannot pay workers instead of giving them time off, except when employment ends. On termination, the employer must pay for any accrued but untaken holiday. Conversely, the employer can deduct pay for holiday taken in excess of the accrued entitlement, provided the employment contract allows this.

Calculating Payment in Lieu on Termination

The formula for payment in lieu:

(Annual entitlement ÷ 12) × complete months worked in the holiday year − holiday already taken

This amount is paid through the final payroll run, subject to PAYE and National Insurance deductions. It appears on the employee’s P45 .

Employer Obligations

Employers must:

• Inform workers of their holiday entitlement, ideally in the employment contract or written statement
• Allow workers to take their full entitlement each year
• Pay holiday pay at the correct rate
• Keep records of holiday taken for at least 2 years
• Not discourage workers from taking their statutory entitlement

Holiday and Payroll

Holiday pay is processed through the normal PAYE payroll system:

• Holiday pay is subject to income tax and NICs
• It is reported through RTI
• It appears on the payslip
• Auto-enrolment pension contributions apply to holiday pay

Holiday Entitlement and Accounting

Holiday pay creates an accrual in the employer’s accounting records . At each reporting date, the employer should recognise a liability for holiday earned but not yet taken:

When the holiday is taken, the accrual is reversed and replaced by the actual payroll cost.

Rolled-Up Holiday Pay

From 1 January 2024, employers of irregular hours and part-year workers can lawfully use rolled-up holiday pay. This means an additional 12.07% is added to the worker’s pay in each pay period instead of paying them separately when they take holiday.

For workers with regular hours, rolled-up holiday pay remains technically unlawful, though it is common practice. HMRC and tribunals will credit rolled-up payments against any holiday pay claim.