Summer is here, the holiday requests are coming in, and you’re nodding along, but are you confident you’re calculating holiday pay correctly?
Most employers aren’t. Here’s what the rules actually say:
First — how much holiday are your team entitled to?
Full-time workers are entitled to 28 days paid holiday per year. That’s your legal minimum although some employers offer more, but 28 days is the minumum.
For part-time workers, it’s pro-rated. So someone working three days a week gets 16.8 days (three-fifths of 28). And for anyone on variable or irregular hours, you calculate their entitlement based on their average hours over the previous 52 weeks.
When your holiday year starts can also vary. It might run from an employee’s start date, the calendar year, or your business financial year.
Quick note on carrying leave over: Unused holiday can’t usually be carried over to the next year unless you’ve agreed it in writing. If you’ve actively prevented someone from taking leave though, the law says the full 5.6 weeks can carry over. Make sure your team has the chance to take what they’re entitled to.
How is holiday pay actually calculated?
Holiday pay should reflect what someone would normally earn. So if someone earns £500 a week, they should receive £500 for each week of holiday they take. It’s calculated on gross earnings — before tax and pension deductions.
Where it gets more complicated is with variable hours or pay. In that case, holiday pay is based on their average weekly earnings over the previous 52 weeks. This catches out a lot of employers who are used to paying a flat rate.
What about rolled-up holiday pay?
You might have heard of this – it’s where you add a holiday pay element into someone’s regular hourly rate, rather than paying them separately when they take time off. So instead of £12 an hour, you pay £13 to “include” holiday.
This isn’t compliant with current regulations. Workers should receive their holiday pay when they actually take the leave not added into their weekly wages. If you’re currently doing this, it’s worth getting advice on how to move to the correct approach.
Your responsibilities as an employer
It’s not just about paying the right amount, you’re also responsible for making sure your team actually takes their holiday. If someone gets to the end of the year with three weeks unused and you haven’t encouraged them to take it, that’s a potential breach of the Working Time Regulations.
A simple way to stay on top of this is to check in with your team on leave balances mid-year. It avoids a scramble in December and keeps you on the right side of the rules.
If an employee takes more holiday than they’ve accrued and then leaves, you can only reclaim the overpayment if your employment contract specifically allows it. Worth checking yours says what you think it says.
New from April 2026: you now need to keep records too
From 6th April 2026, HMRC requires employers to keep detailed records of annual leave and holiday pay for six years. This is a change worth knowing about, particularly if your record keeping has been informal up to now.
The records you need to maintain cover how holiday is accrued for each worker, any payments made in lieu of annual leave including for carried over leave, and evidence of compliance with the rules overall.
The Fair Work Agency will be enforcing these new requirements. Failing to keep the right records could leave you exposed if a dispute arises, even if you’ve actually been paying people correctly.
If you’re not sure your current systems would stand up to scrutiny, now is a good time to get that sorted. Your payroll software should be able to help, and if you run payroll through us, it’s something we can help you with.
Not sure where you stand?
Holiday pay rules catch a lot of businesses out, especially where hours vary. If you employ anyone and you’re not 100% confident your approach is right, it’s a good time to check before holiday time arrives.
We help service businesses across Shropshire make sure their payroll is right all year round. If you’d like to find out more about our payroll service and how we can take the pressure off you, book a discovery call at freshclarity.co.uk