Holiday Pay Calculation UK: Employer's Guide

Getting holiday pay wrong is one of the most common payroll mistakes. Underpaying holiday pay can lead to tribunal claims and back-pay stretching back years.

The Basic Rule

Holiday pay should reflect what the worker would have earned if they'd been at work. This means a "week's pay" for holiday purposes may be more than basic salary.

Types of Workers

Fixed Hours, Fixed Pay

For workers with regular hours and consistent pay:

Weekly pay = Normal weekly earnings

This includes:

• Basic salary
• Regular contractual payments
• Any allowances paid regularly

Variable Hours Workers

For workers whose hours vary week to week:

Use the 52-week reference period

1. Look back at the last 52 weeks where pay was received
2. Total up all earnings
3. Divide by 52

If they haven't worked 52 weeks, use however many weeks they have worked.

No Normal Working Hours

For workers with no set pattern at all:

Calculate average over 52 weeks

Include all weeks where work was done, skip weeks with no work.

What to Include in Holiday Pay

Must Include (for first 4 weeks statutory leave)

Element	Include?	Notes
Basic pay	Yes	Always
Compulsory overtime	Yes	Regular pattern
Regular voluntary overtime	Yes	If normally worked
Commission	Yes	If intrinsically linked to performance
Shift allowances	Yes	If regular
On-call payments	Yes	If regular
Travel time payments	Yes	If part of normal duties

The Legal Position

The law distinguishes between:

First 4 weeks' leave (EU-derived):

• Must include all normal remuneration
• Includes regular overtime, commission, allowances

Additional 1.6 weeks' statutory leave:

• Can be paid at basic rate only
• Unless contract says otherwise

Contractual leave above statutory:

• Whatever your contract states
• Can be basic pay only

Calculating for Part-Time Workers

Pro-Rata Entitlement

Part-time workers get holiday entitlement pro-rata:

Formula:

(Days worked per week ÷ 5) × 28 = Annual entitlement in days

Example: 3 days per week

(3 ÷ 5) × 28 = 16.8 days per year

Calculating Pay

For fixed hours part-timers:

• Pay their normal daily rate for each day of holiday

For variable hours part-timers:

• Use the 52-week average method

Commission and Bonus

Commission

Include commission in holiday pay if:

• It's directly linked to work performed
• The worker is contractually obliged to earn it
• It forms a regular part of earnings

Calculation method: Average commission over 52 weeks, add to holiday pay.

Bonus

Discretionary bonuses: Usually not included Contractual bonuses tied to performance: Usually included

Overtime

Compulsory Overtime

Must be included if:

• Contract requires it when offered
• It's worked regularly

Voluntary Overtime

Include if:

• Regularly worked over a sufficient period
• The pattern suggests it's normal earnings

"Regularly" means: Worked consistently over several months, not just occasionally.

The 52-Week Reference Period

How It Works

1. Start from the last complete pay period before holiday
2. Count back up to 52 paid weeks
3. Skip any weeks with no earnings
4. Go back further if needed (up to 104 weeks maximum)
5. Calculate average weekly pay

Example Calculation

Worker takes holiday starting 15 March.

Step 1: Identify last 52 weeks with pay (January Year 2 back to February Year 1)

Step 2: Add up total earnings: £26,000

Step 3: Divide by 52: £500 per week

Step 4: Holiday pay = £500 per week of leave

Weeks to Skip

Don't count weeks where the worker received no pay due to:

• Sickness
• Statutory leave (maternity, paternity, etc.)
• Unpaid leave

Go back further to find 52 paid weeks.

Rolled-Up Holiday Pay

What Is It?

Adding a percentage to hourly rate instead of paying separately for holidays.

Is It Legal?

Technically no, but commonly used.

The law requires workers to receive pay when they take leave, not as an uplift to regular pay. However, tribunals recognise it happens and may offset already-paid rolled-up pay against claims.

If You Use Rolled-Up Pay

• Make it clear in the contract
• Show it separately on payslips
• Calculate correctly (12.07% of hours worked for statutory minimum)
• Encourage workers to actually take leave

Better practice: Pay holiday pay when leave is taken.

Accrual Method

For the first year or irregular patterns:

Accrual rate: Workers accrue 1/12th of annual entitlement each month worked.

Example:

• 28 days annual entitlement
• After 3 months: 28 × (3/12) = 7 days accrued

Holiday Pay on Termination

When employment ends, pay for:

• Untaken accrued holiday
• At the correct rate (including regular overtime etc. for first 4 weeks' worth)

Calculation:

(Days accrued - Days taken) × Daily rate = Final holiday pay

Common Mistakes

1. Basic Pay Only

Paying just basic salary when overtime and commission should be included.

2. Wrong Reference Period

Using 12 weeks instead of 52 weeks (the law changed in 2020).

3. Ignoring Part-Year Workers

Not properly calculating for workers who join mid-year.

4. Incorrect Pro-Rating

Getting part-time calculations wrong.

5. Forgetting Leavers

Not paying accrued holiday on termination.

6. Rolled-Up Without Clarity

Using rolled-up pay without making it clear in contract and payslips.

Underpayment Claims

Time Limits

Workers can claim back pay for up to 2 years of underpaid holiday pay.

Tribunal Claims

• Unlawful deduction from wages
• Can claim for each underpaid holiday period
• May include interest

Avoiding Claims

1. Audit your holiday pay calculations
2. Identify workers with variable pay
3. Check if overtime/commission should be included
4. Correct any underpayments
5. Document your methodology

Practical Examples

Example 1: Sales Rep with Commission

Basic salary: £25,000 per year Average commission (52 weeks): £15,000 per year Total annual pay: £40,000 Weekly pay: £769.23

Holiday pay should be £769.23 per week, not just basic salary.

Example 2: Warehouse Worker with Regular Overtime

Basic hours: 37.5 per week at £12/hour = £450 Regular overtime: 5 hours per week at £18/hour = £90 Total weekly pay: £540

Holiday pay should be £540 per week for the first 4 weeks of leave.

Example 3: Zero-Hours Worker

Hours vary significantly week to week

Calculate 52-week average:

• Total earnings over 52 paid weeks: £18,200
• Average weekly pay: £350
• Daily rate (5-day week): £70

Holiday pay = £70 per day of leave taken.