Holiday Pay
Holiday pay is the pay an employee receives while taking their annual leave entitlement, calculated based on their normal earnings.
benefits
Category
intermediate
Difficulty
5 min read
Read time
2025-01-15
Updated
Definition
Short definition
Holiday pay is the pay an employee receives while taking their annual leave entitlement, calculated based on their normal earnings.
Detailed explanation
Holiday pay is the remuneration employees receive when they take their annual leave entitlement. Rather than losing income during time off, employees continue to receive pay as if they were working.
The calculation of holiday pay can be complex, particularly for workers with variable hours or irregular pay patterns. Recent legal developments in the UK and EU have clarified that holiday pay should reflect normal remuneration, including regular overtime and certain allowances.
Accurate holiday pay calculation is essential for employer compliance and ensures employees can afford to take their entitled time off, supporting work-life balance and wellbeing.
Practical guidance
How it works
Holiday pay is calculated based on an employee's normal remuneration. For salaried employees, this is typically their regular salary. For hourly or variable-hours workers, employers calculate average earnings over a 52-week reference period, excluding weeks with no pay.
Best practices
Use software to automate holiday pay calculations
Keep accurate records of all earnings for averaging
Regularly audit holiday pay compliance
Train payroll staff on complex scenarios
Legal context
Legal basis
Working Time Regulations 1998, Employment Rights Act 1996
Jurisdiction: UK
Key provisions
Holiday pay must be paid at the normal rate of pay
For variable-hours workers, use 52-week reference period
Regular overtime and commission should be included
Holiday pay must be paid when leave is taken or on termination
Official source
Frequently asked questions
How is holiday pay calculated for part-time workers?
Part-time workers receive holiday pay on a pro-rata basis. Their holiday pay is calculated based on their actual earnings, either their regular part-time rate or an average if their hours vary.
Should overtime be included in holiday pay?
Yes, regular and compulsory overtime should be included in holiday pay calculations. The key test is whether the overtime forms part of the worker's normal remuneration.
What happens to holiday pay when I leave my job?
When you leave employment, your employer must pay you for any accrued but unused annual leave. This is calculated based on the proportion of the leave year worked.
Related glossary terms
Annual Leave
Annual leave is paid time off from work that employees are entitled to take each year for rest, relaxation, and personal activities.
Statutory Sick Pay
Statutory Sick Pay (SSP) is the minimum sick pay UK employers must pay eligible employees who are off work due to illness, currently £116.75 per week for up to 28 weeks.
Pro-Rata
Pro-rata means calculating entitlements proportionally based on hours worked or time employed, commonly used for part-time employees or mid-year starters.
Accrual
Accrual is the process by which employees earn leave entitlement incrementally over time, rather than receiving their full allocation at the start of the year.