Holiday Pay Explained: How to Calculate & Avoid Mistakes

Everyone loves a holiday. A week in the sunshine, a few days exploring somewhere new or simply enjoying some time away from work.

While employees are thinking about where they're going, employers have something else to consider. How much holiday are they entitled to, and how much should they be paid while they're away? For some employees, the calculation is straightforward. For others, particularly those working variable hours, receiving regular overtime or earning commission, it can become considerably more complicated. There's a common misconception that holiday pay is simply someone's hourly rate multiplied by the hours they've taken off. Sometimes it is but not always.

Let's explain how holiday entitlement and holiday pay work, with some practical examples to help employers understand what they should be calculating.

Holiday entitlement and holiday pay?

These two things are closely connected, but they're not the same. Holiday entitlement is the amount of paid time off a worker is entitled to take. Holiday pay is the amount they're entitled to receive when they take that time off.

For example, someone might be entitled to 28 days of annual leave. Calculating what they should be paid for those days depends on their working arrangements and earnings. That's where employers need to be careful.

How much holiday are employees entitled to?

Most workers in the UK are legally entitled to 5.6 weeks of paid annual leave each year. For someone working five days a week, that's 5 days × 5.6 weeks = 28 days. This is the statutory minimum.

Employers can offer more generous holiday entitlement, but they generally cannot provide less. The statutory entitlement is capped at 28 days for someone working five or more days per week.

Are bank holidays included?

This is something employers regularly ask. Bank holidays do not automatically have to be given as additional paid leave. They can be included within the statutory 5.6 weeks. For example, an employment contract might provide: 20 days' annual leave plus 8 bank holidays. That's 28 days in total.

Alternatively, an employer might offer 28 days of leave that includes bank holidays. Both arrangements can meet the statutory minimum for a five-day worker, provided the worker actually receives their full entitlement.

The important thing is understanding what the employment contract says. Remember, bank holidays don't always fall neatly into an employee's normal working pattern. Part-time employees may need their entitlement calculated differently to ensure they're treated fairly.

Calculating holiday entitlement for part-time employees

Part-time employees are still entitled to 5.6 weeks of statutory paid holiday. Their entitlement is proportionate to their working pattern. For example:

Days worked per week	Annual holiday entitlement
5 days	28 days
4 days	22.4 days
3 days	16.8 days
2 days	11.2 days
1 day	5.6 days

The calculation is: Days worked each week × 5.6

What happens if someone works different numbers of hours on different days? That's where calculating holiday in hours can sometimes be more practical. For example, someone working 20 hours every week might have: 20 hours × 5.6 = 112 hours of annual leave. This can make it easier to account for days of different lengths.

Employers need to ensure the calculation reflects the employee's working arrangements and doesn't reduce their statutory entitlement.

Example 1: Holiday pay for a salaried employee

Let's start with the simplest example.

Imagine an employee earns £30,000 per year.

They work five days a week, Monday to Friday, and receive the same salary every month.

Their monthly gross salary is £30,000 ÷ 12 = £2,500

They take one week of annual leave.

Assuming they receive fixed pay with no additional earnings that need including, they simply continue receiving their normal salary. There's no need to deduct a week's wages and calculate a separate holiday payment. They receive their usual £2,500 gross salary for the month.

For reference, their basic weekly salary is £30,000 ÷ 52 = £576.92 but because they're salaried and their pay doesn't vary, the holiday is normally covered within their regular monthly pay. Simple enough. Unfortunately, not everyone's working arrangements are quite so straightforward.

Example 2: Holiday pay for a part-time employee

Imagine someone works three days per week.

They work six hours per day and earn £15 per hour.

Their weekly hours are 3 days × 6 hours = 18 hours

Their weekly pay is 18 hours × £15 = £270

Their annual statutory holiday entitlement is 3 days × 5.6 weeks = 16.8 days Or, expressed in hours 18 hours × 5.6 weeks = 100.8 hours

Now imagine they take one of their normal six-hour working days as holiday.

Their holiday pay would be 6 hours × £15 = £90

If they take a full week off, their holiday pay would be £270.

This assumes they work regular hours at a fixed rate, without additional payments that need to be included. Part-time employees don't receive less than 5.6 weeks of holiday. Their entitlement simply reflects their normal working week.

Example 3: Holiday pay when earnings vary

Now let's make things a little more interesting.

Imagine an employee works variable hours throughout the year.

Some weeks they work 20 hours.

Other weeks they work 35.

Occasionally they work considerably more.

Their pay changes from week to week. So what should they receive when they take a week's holiday?

For workers whose holiday pay is based on average earnings, employers generally use a 52-week reference period. This means looking at the relevant pay received over the previous 52 paid weeks, applying the rules for their particular working arrangements.

Let's use a simplified example. Imagine the employee's relevant earnings over 52 paid weeks total £20,800.

Their average weekly pay is £20,800 ÷ 52 = £400

If they take one week's holiday, their holiday pay would be £400.

This is a simplified illustration. The actual calculation depends on their working pattern, the relevant pay elements and whether they have a full 52 weeks of pay history but the principle is important. Holiday pay should reflect the earnings that the law requires to be included, rather than automatically using someone's basic hourly rate.

Do overtime and commission count towards holiday pay?

This is another area where employers can make mistakes. Imagine an employee earns a basic salary but regularly works overtime. Perhaps they receive commission as a normal part of their earnings. If you calculate their holiday pay using only their basic salary, they may receive less than their normal remuneration while taking leave and that may not comply with the rules. Holiday pay can need to include payments such as:

• Regular overtime.

• Commission linked to contractual duties.

• Certain payments related to professional qualifications, seniority or length of service.

The precise treatment depends on the worker's circumstances and the type of payment. The important point is that holiday pay isn't necessarily limited to basic wages. If your employees regularly receive overtime or commission, it's worth reviewing how holiday pay is calculated.

What about the 12.07% holiday rule?

This is something that causes considerable confusion.

You may have heard that holiday entitlement can be calculated as 12.07% of hours worked and you may have seen holiday pay calculated using the same percentage. But here's the important bit, the 12.07% method doesn't apply to every employee who is paid hourly.

Under the rules applying to leave years beginning on or after 1 April 2024, the 12.07% holiday accrual method applies to qualifying irregular-hours and part-year workers. An irregular-hours worker is broadly someone whose paid hours are wholly or mostly variable under their contract. A part-year worker is someone whose contract continues throughout the year but who is only required to work for part of it, with qualifying unpaid periods. An employee working a fixed 20 hours every week doesn't automatically become an irregular-hours worker simply because they're paid hourly.

Let's look at an example

Imagine an irregular-hours worker completes 100 hours during a monthly pay period.

Their holiday entitlement accrual would be 100 hours × 12.07% = 12.07 hours

The statutory rounding rules then apply to the entitlement accrued in that pay period.

The percentage is based on the statutory minimum of 5.6 weeks' annual leave.

If the employer offers more generous contractual holiday, the calculation may need adjusting.

There are separate rules for holiday accrual during sickness and statutory leave.

This is an area where it's important to establish the worker's correct employment arrangements before applying the calculation.

What is rolled-up holiday pay?

Rolled-up holiday pay is another term employers may encounter. It means paying an additional amount for holiday alongside a worker's normal wages, rather than paying holiday pay when the worker actually takes leave. Under the current rules, employers can use rolled-up holiday pay for qualifying irregular-hours and part-year workers. It isn't generally permitted for regular-hours employees. Where rolled-up holiday pay is used, it must be calculated at a minimum of 12.07% of the worker's relevant total pay for the pay period and shown separately on their payslip. For example:

Payment	Amount
Wages for the period	£1,000
Rolled-up holiday pay at 12.07%	£120.70
Total gross payment	£1,120.70

This assumes the £1,000 is the relevant pay figure for the calculation. The worker still needs to be able to take their holiday entitlement. They simply receive the holiday pay throughout the year rather than when they take the time off. There are additional requirements, including how holiday pay is handled during sickness and statutory leave. Introducing rolled-up holiday pay may affect employment terms, employers should obtain appropriate HR advice before changing their arrangements. It's a permitted method for specific categories of workers, not a shortcut that can be applied to everybody.

How do you calculate holiday for a new employee?

When someone starts partway through the holiday year, they won't normally be entitled to the full annual allowance for that year. Their entitlement needs to reflect the proportion of the holiday year for which they're employed.

For example, imagine someone works five days per week and is entitled to 28 days' annual leave. They start exactly halfway through the employer's holiday year. Their entitlement for the remaining half of that year would ordinarily be 28 days × 6 ÷ 12 = 14 days. This assumes a straightforward regular-hours arrangement. The exact calculation may depend on the start date, the employer's holiday year and the applicable accrual rules. For regular-hours workers in their first year, employers can use a monthly accrual method, subject to the relevant statutory rules. For irregular-hours and part-year workers, the specific 12.07% accrual rules apply.

What happens when an employee leaves?

Holiday pay is particularly important when calculating somebody's final wages. When an employee leaves, you need to establish:

• How much holiday have they accrued?

• How much have they already taken?

• Is there any unused entitlement that needs paying?

Let's use a simple example.

An employee works five days per week and receives 28 days of annual leave.

They leave halfway through the holiday year.

For this example, we'll assume they've accrued 14 days.

They've already taken 9 days.

That leaves14 − 9 = 5 days outstanding

If their normal daily holiday pay is £100, the payment for unused holiday would be 5 days × £100 = £500. That amount would normally be included in their final payroll, subject to the applicable deductions.

What if they've taken more holiday than they've accrued? There may be circumstances where an employer can recover the excess from final pay, but this needs to be permitted by an appropriate agreement and handled correctly. It's not something to deduct automatically without checking the contractual and legal position. Remember, different calculations may be needed for irregular-hours workers or employees with variable earnings.

Why holiday records are more important than ever

There's an important change employers need to be aware of. From 6 April 2026, employers must keep adequate records of annual leave and holiday pay for at least six years from the date the records are made. These records need to cover matters including:

• Holiday taken by workers.

• Holiday carried forward from previous years.

• Holiday pay paid.

• Payments made for unused holiday.

• Details of what has been included in holiday pay calculations, such as relevant commission or other payments.

Employers can use suitable software, spreadsheets or other appropriate systems.

The important thing is that the records are accurate, complete and available when needed. This isn't simply about making payroll easier. It's now an explicit legal record-keeping requirement. It means employers should be thinking carefully about how they track holiday entitlement and payments. A payroll system might calculate holiday pay, but it doesn't necessarily know when an employee has taken leave unless somebody records that information. Which brings us to another common problem.

Payroll software doesn't know everything

Modern payroll software can do an enormous amount. It can calculate wages, deductions, pension contributions and statutory payments. Some systems can also track holiday entitlement and calculate holiday pay but the calculations are only as accurate as the information provided.

• If an employee works irregular hours and those hours aren't recorded correctly, the holiday calculation may be wrong.

• If regular overtime isn't included when it should be, holiday pay may be understated.

• If holiday taken isn't recorded, the remaining entitlement may be incorrect.

• If somebody leaves halfway through the year, the final holiday calculation needs to reflect their actual circumstances.

Software can calculate the numbers. It can't always tell you whether you've given it the right information. That's why employers need reliable systems for recording hours, leave and relevant earnings.

Five common holiday pay mistakes

Let's finish by looking at some of the things employers should avoid.

1. Assuming everyone gets 28 days

The statutory entitlement is 5.6 weeks. For someone working five days per week, that's 28 days. Part-time workers have a proportionate entitlement, and irregular-hours workers have specific accrual rules.

2. Forgetting about overtime and commission

Holiday pay may need to include more than basic wages. Regular overtime and certain commission payments can affect the calculation.

3. Applying 12.07% to every hourly paid employee

Being paid hourly doesn't automatically make someone an irregular-hours worker. The correct method depends on their contractual working arrangements.

4. Forgetting about bank holidays

Bank holidays can be included within statutory annual leave. Employers need to make sure part-time employees and those with different working patterns receive their proper entitlement.

5. Not keeping accurate holiday records

If you don't know how much leave somebody has taken, how much they've accrued or what they've been paid, it's difficult to establish whether the calculations are correct. From April 2026, maintaining adequate records is an explicit legal requirement.

Holiday pay doesn't need to be a headache

Holiday pay can be straightforward. For someone working regular hours at a fixed salary, it's often simply a case of continuing their normal pay while they're away. Where employees work variable hours, receive overtime or commission, start or leave partway through the holiday year or qualify for the newer irregular-hours rules, the calculations need more attention.

The important thing is understanding which rules apply to each worker because holiday entitlement and holiday pay aren't always calculated in the same way for everyone. Getting them right isn't just about complying with employment legislation. It's about making sure employees receive the paid leave they're entitled to, avoiding unexpected payroll corrections and keeping reliable business records. Good payroll starts with accurate information.

Before you calculate someone's holiday pay, make sure you understand their working pattern, their entitlement and which earnings need to be included. After all, your employees should be able to enjoy their holidays without worrying whether they've been paid correctly and you should be able to run payroll knowing the calculations have been done properly.