Holiday Pay: How to Calculate and Manage It for UK Employees

Introduction to UK Holiday Pay

Understanding UK holiday pay is crucial for employers in 2025/2026, with evolving regulations impacting statutory minimums, calculation methods, and record-keeping. This guide clarifies these essentials, ensuring compliance and fair treatment for all workers, from full-time to irregular hours and variable pay employees.

Statutory Holiday Entitlement

Almost all UK 'workers' are legally entitled to 5.6 weeks of paid annual leave [1]. This includes agency, irregular hours, and part-year workers. For a 5-day week, this equates to 28 days, which can include bank holidays at the employer's discretion. The statutory cap is 28 days, regardless of working more than 5 days a week [1].

Employers can use the official holiday entitlement calculator on GOV.UK for accurate pro-rata calculations [1].

Holiday Pay for Irregular Hours & Part-Year Workers

For leave years starting on or after 1 April 2024, irregular hours and part-year workers accrue holiday at 12.07% of actual hours worked per pay period [9, 11]. This percentage reflects 5.6 weeks of leave out of 46.4 working weeks in a year (52 - 5.6) [11].

Holiday pay is calculated using a 52-week reference period, excluding weeks with no pay, to ensure it reflects average earnings [7, 10].

Calculation Steps:

1. Reference Period: Use the 52 weeks prior to the holiday, adjusting for weeks with no pay (going back up to 104 weeks) [7].
2. Total Earnings: Sum all remuneration from the adjusted 52-week period.
3. Average Weekly Pay: Divide total earnings by 52.
4. Annual Entitlement: Multiply average weekly pay by 5.6 weeks [7].

Visualising Holiday Entitlement Accrual

The chart below illustrates how holiday entitlement builds up proportionally to hours worked for irregular workers.

Variable Pay: Overtime, Commission, and Bonuses

Holiday pay must reflect a worker's 'normal' remuneration, not just basic salary. The *Harpur Trust v Brazel* Supreme Court ruling (July 2022) affirmed that regular overtime, commission, and performance-related bonuses must be included, especially for the first four weeks of statutory leave [3, 6, 17, 18, 19]. This prevents financial disadvantage for taking leave.

Inclusion of Pay Elements:

Example: Variable Pay Calculation

This employee would receive £550 for each week of holiday, reflecting their normal earning capacity.

Accrual During Leave & Sickness

Workers continue to accrue holiday during maternity, paternity, adoption leave, and sick leave [1]. They can also request holiday during sick leave [1].

Carrying Over Holiday Entitlement

While statutory leave is generally 'use it or lose it', exceptions allow carry-over [13]:

• Agreement: Up to 8 days (1.6 weeks) can be carried over with employer-employee agreement [13].
• Sick Leave: Max 4 weeks can be carried over if untaken due to sick leave, to be used within 18 months [20].
• Family Leave: All 5.6 weeks can be carried over if untaken due to maternity, paternity, or adoption leave [23].
• COVID-19 Rules: Temporary carry-over rules expired on 31 March 2024 [24, 25].

Payment in Lieu on Termination

Upon termination, workers are entitled to payment for accrued but untaken statutory holiday ('payment in lieu') [1]. This is calculated based on the proportion of the leave year worked and untaken holiday, at the worker's normal rate of pay [21, 22, 26].

New Record-Keeping Requirements (from April 2026)

From 6 April 2026, UK employers must legally retain comprehensive holiday pay and annual leave records for a minimum of six years [4, 14, 15]. This new duty highlights the need for robust payroll and HR systems.

How Payroll Software Helps

Modern payroll software simplifies holiday pay management by automating calculations, tracking accruals, and ensuring compliance. Features include automated accrual, variable pay integration, carry-over management, and simplified termination calculations. Popular UK providers like Staffology Payroll, ADP, and PayFit offer these essential tools [16].

Conclusion

Navigating UK holiday pay regulations demands attention to detail. By understanding statutory entitlements, correctly calculating variable pay, and leveraging effective payroll software, businesses can ensure compliance, foster employee satisfaction, and avoid legal challenges. Staying informed and proactive is key.