Calculating holiday pay correctly might seem straightforward, but it’s one of the most complex aspects of payroll management. With varying employment types, fluctuating work patterns, and evolving regulations, knowing how to calculate holiday pay accurately is essential for every UK employer. Getting it wrong doesn’t just create administrative complications — it can lead to tribunal claims, financial penalties, and damaged employee relations.
This comprehensive guide breaks down exactly what you need to know to calculate holiday pay correctly for every type of worker in your organisation, helping you stay compliant while maintaining an efficient payroll process.
The key points covered in this article:
- Understanding UK statutory requirements for holiday pay calculations
- Step-by-step methods for different employment types
- Including overtime, bonuses, and commission in calculations
- Managing holiday pay for leavers and new starters
- Common mistakes and how to avoid them
- How Kelio’s solutions streamline holiday pay management
What does UK law say about holiday pay? Here’s what you need to know
Navigating the complexities of holiday pay calculation can be challenging, but understanding the legal foundation is essential for UK employers. The Working Time Regulations 1998 establish the framework for how to calculate holiday pay, ensuring workers receive appropriate compensation during their time off.
Statutory entitlement explained: the 5.6 weeks rule
All workers in the UK are legally entitled to a minimum of 5.6 weeks of paid annual leave, which equates to 28 days for those working a standard five-day week. This entitlement includes bank holidays, though employers can choose whether to count these in the statutory minimum or provide them as additional leave.
- Did you know? The UK’s statutory holiday entitlement of 5.6 weeks exceeds the EU minimum requirement of 4 weeks, giving British workers additional protected paid leave.
Want to know more about your rights and responsibilities? Check out our comprehensive guide on annual leave entitlement.
Who qualifies and how entitlement is accrued
Before we delve into how to calculate holiday pay, let’s take a look at the conditions. Holiday pay entitlement applies to most workers, including full-time, part-time, zero-hours, and agency staff. Workers begin accruing holiday entitlement from day one of employment, typically at a rate of 1/12th of their annual allowance each month during the first year.
For those with irregular hours, holiday entitlement accrues proportionally to hours worked. Understanding how to calculate holiday pay for these workers requires careful attention to their specific patterns.
What should be included in holiday pay calculations
When calculating holiday pay, the basic principle is that workers must receive their normal remuneration — what they would have earned had they been working. This includes:
- Basic salary or regular wages
- Regularly paid overtime (both guaranteed and non-guaranteed)
- Commission payments and performance-related bonuses
- Shift premiums or allowances
Remember: Excluding regular elements of pay from holiday pay calculations can lead to unlawful deduction claims, potentially resulting in significant back-pay liabilities.
How to calculate holiday pay for hourly employees
The calculation method varies depending on employment type and working pattern. Let’s explore the approaches required for various contracts.
For fixed hours staff: using regular pay as a base
For employees with fixed hours and fixed pay, holiday pay calculation is straightforward. They should receive the same pay during annual leave as they would for regular work.
For example, if an employee earns £500 per week for a five-day working week, their holiday pay for one week would be £500, guaranteeing no financial disadvantage.
If the fixed-hours employee receives regular overtime or commission, these elements must also be factored into their holiday pay calculation to accurately reflect normal remuneration.
For hourly employees: when and how to apply the 52-week average
For hourly-paid workers with variable hours or pay, calculating holiday pay requires an average pay method. Since April 2020, this average must be calculated over a 52-week reference period (previously 12 weeks).
How to calculate holiday pay (average):
- Identify the last 52 weeks in which the employee was paid
- Calculate the total pay received during these weeks
- Divide by 52 (or the available number of weeks if less than 52)
For example, if an employee earned £10,400 over 52 paid weeks, their average weekly holiday pay would be £200.
- Did you know? Only weeks where the employee was paid should count. If there are weeks with zero pay, look further back, up to 104 weeks. If you have fewer than 52 weeks of data, use all available complete weeks.
To simplify these calculations, our holiday entitlement calculator tool can help you determine the correct amounts for all employee types.
How to calculate holiday pay for zero-hours contracts
Zero-hours contracts present unique challenges when calculating holiday pay. Workers on these contracts are still entitled to 5.6 weeks of paid leave, but how do you calculate this when hours fluctuate?
The 12.07% method: when and how to use it
The 12.07% method is practical for calculating holiday entitlement for zero-hours workers. This percentage comes from the standard 5.6 weeks of holiday divided by the remaining 46.4 working weeks in the year (52 - 5.6 = 46.4), giving 12.07%.
For zero-hours workers, you can calculate holiday pay entitlement as 12.07% of hours worked. For example, if a zero-hours employee worked 100 hours in a month, they would accrue approximately 12.07 hours of paid holiday.
Handling irregular working patterns and pay periods
For workers with truly irregular patterns, calculating holiday pay requires careful tracking of hours worked and corresponding pay.
The key is ensuring these workers receive holiday pay that accurately reflects what they would have earned had they been working:
- Record all hours worked and pay received
- Apply the 52-week average method to establish a representative rate
- Use this average rate to calculate holiday pay
For employees who have worked less than 52 weeks, use the average from their entire employment period.
Rolled-up holiday pay: is it still allowed?
Rolled-up holiday pay — where holiday pay is included in the hourly rate—has been controversial. The European Court of Justice ruled against this practice, stating that holiday pay should be paid when leave is taken.
However, for leave years beginning on or after 1 April 2024, new regulations allow employers to use rolled-up holiday pay for irregular hours workers and part-year workers, recognising the practical challenges of calculating holiday pay for these categories.
Remember: If using rolled-up holiday pay for eligible workers, clearly identify the holiday pay element on payslips and in contracts, ensuring complete transparency.
Calculating average holiday pay: The rules and real-world examples
How do you calculate average holiday pay, in practice? The shift to a 52-week reference period aims to provide a more accurate reflection of normal pay, especially for those with fluctuating hours or seasonal patterns.
How to apply the 52-week average correctly
To apply the 52-week average method:
- Identify the relevant pay reference period (52 weeks preceding the holiday)
- Include all remuneration paid during this period
- Only count weeks where the employee was paid
- If the employee has worked for fewer than 52 weeks, use all available weeks
- Divide the total remuneration by the number of weeks to find the average weekly pay
What to do when some weeks are unpaid
When an employee has weeks without pay within the 52-week reference period — such as sick leave or unpaid leave — exclude these weeks from the calculation. Instead, count further back in time, up to 104 weeks.
If an employee has worked for less than 52 weeks and has unpaid weeks within that period, only use the paid weeks in your calculation.
How to calculate holiday pay for leavers
When an employee leaves, calculating their final holiday pay correctly is critical for legal compliance and avoiding disputes.
Calculating accrued leave on departure
When an employee leaves, calculate their accrued but untaken holiday by:
- Determining how much of the leave year has passed (e.g. 8 months = 8/12 of the year)
- Calculating holiday entitlement for this period (e.g. 8/12 × 28 days = 18.7 days)
- Subtracting any holiday already taken in the current leave year
Effective absence and leave management software can track this information automatically, ensuring you have accurate records of all leave taken throughout the employment period.
Payment in lieu of untaken holiday
Any accrued but untaken holiday must be paid in lieu when employment ends. Calculate this payment using the same principles as regular holiday pay, including elements like overtime and commission where appropriate.
Legal compliance when employees leave
Ensure compliance by:
- Calculating holiday pay correctly, including all relevant pay elements
- Making payment in lieu for all accrued but untaken statutory holiday
- Only deducting for excess holiday taken if there’s a relevant contractual clause
- Maintaining accurate records demonstrating compliance
The most common holiday pay mistakes and how to avoid them
Using the wrong reference periods
A frequent mistake is using incorrect reference periods. Remember, since April 2020, the reference period for variable pay is 52 weeks (not 12), excluding weeks with no pay.
Using outdated reference periods or failing to look back beyond 52 weeks when there are unpaid weeks can result in underpayment claims.
Forgetting to include bonuses and commissions
Another common error is overlooking elements of normal remuneration, such as regular bonuses, commission, and overtime. These payments must be included in holiday pay calculations for statutory leave.
Relying on outdated or manual payroll processes
Managing complex holiday-pay calculations manually introduces significant error risk.
Many employers are now using digital solutions with a user-friendly HR Portal to simplify these processes, reducing administrative burden while increasing accuracy.
How Kelio helps you automate and secure holiday pay calculations
How do you calculate hold pay without the headache? Kelio’s comprehensive workforce management solution streamlines the entire process, from tracking hours worked to calculating accurate holiday pay.
Time and attendance tracking that updates in real-time
Kelio’s time and attendance system provides a solid foundation for accurate calculations by:
- Recording all working hours, including overtime and various shift patterns
- Tracking absences and leave with complete visibility
- Distinguishing between different types of work time and pay rates
- Maintaining historical data essential for reference period calculations
Seamless integration with your payroll system
Kelio’s payroll software connects with over 160 payroll software packages.
Built-in compliance with UK employment law
Stay compliant with UK employment law effortlessly. Kelio’s regularly updated system keeps you covered.
Kelio provides a comprehensive leave-management solution that improves the experience for both managers and employees.
Contact today for a demonstration of how our tools can transform your HR processes
How to calculate holiday pay in the UK: Frequently asked questions
How do I calculate holiday pay for part-time employees?
Part-time employees receive holiday pay pro-rata to full-time staff. For fixed hours, use their normal weekly pay. For variable hours, apply the 52-week average method.
What about employees who don’t work every week?
For employees with irregular patterns like term-time or zero-hours workers, the Supreme Court ruling in Harpur Trust v Brazel established they’re entitled to 5.6 weeks of holiday using the 52-week average method. However, for leave years beginning on or after April 2024, new regulations permit using the 12.07% method for these workers.
Can I include variable payments like bonuses or overtime?
Yes, regular bonuses, commission, and overtime must be included in holiday pay calculations as holiday pay should reflect normal remuneration. This is mandatory for the first four weeks of statutory leave, while for the additional 1.6 weeks, employers can choose to include only basic pay.
How is holiday pay managed when an employee leaves?
When employment ends, calculate accrued but untaken holiday based on the portion of the leave year worked and pay in lieu using the same calculation principles as regular holiday pay. If an employee has taken excess holiday, deductions from final pay are only permitted with a clear contractual clause allowing this.
