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Holiday Pay: The Complete Guide for Employers

Rachel Greenway
Last updated on August 10, 2023

Holiday pay: Perhaps few things in life are as wonderful as these two words put together.

It’s an entitlement not every country provides, and one we are somewhat fortunate to have here in the UK. The 9 to 5 grind is real, so the fact that employees get paid to take time off means they can enjoy a few well-deserved breaks throughout the year - whether that’s to rest and recharge or pursue other personal projects or passions.  

But what is holiday pay and entitlement, and how is it calculated? In our latest guide, we unpack everything to do with holiday pay, how it’s calculated at a basic level, as well as a few other things you need to consider when putting together your first holiday pay policy.

PayFit Top Tip

Between January and July 2023, the government ran consultations to ask for the opinions of payroll professionals in relation to holiday pay and holiday entitlement. It then issued its full response to the consultations which you read here.

What is holiday pay?

Holiday pay is the amount of money you pay an employee for taking any leave they’re entitled to.. In other words, employees should receive holiday pay for their statutory entitlement as well as any additional contractual holiday they’re entitled to. 

The most typical example is a full-time employee working a set amount of days or hours every week. As UK legislation states, these workers are entitled to 5.6 weeks of holiday. This consists of one 4-week block that originally came from EU employment regulations and an additional 1.6 week block from Working Time Regulations (UK) law, both of which are paid at slightly different rates. 

Legislation bytes

Upon leaving the EU, the government had a chance to combine the 1.6 and 4 week blocks to create one single entitlement of 5.6 weeks, paid at the same rate. They’ve since decided not to make this change, and keep payment rates for each block the same.

How does holiday pay work?

Based on this example, many assume that holiday pay should be calculated using the employee’s base salary. But that’s not quite the case.

In reality, there are a couple of things to bear in mind - factors, if you will, that can affect the final calculation of pay; these include:

  • the type of employment contract a worker is on - whether that’s a fixed contract or they work irregular hours;

  • whether or not an employee receives things like regular overtime, bonuses, or commission payments;

  • what the employer considers, or what the employee can prove to be ‘regular’.

All of these factors mean that working out holiday pay isn’t quite as straightforward in some scenarios as we’d like it to be. Still, let’s look at how you can calculate holiday pay at a basic level.  

How to calculate holiday pay

For the first 4-week block of statutory entitlement, working out holiday pay is pretty simple - it’s the employee’s average weekly pay. The additional 1.6 weeks can be paid at a higher rate, though at the discretion of the employer.

Our post on how to calculate holiday pay provides a full breakdown of the calculation as well as guidance on how to address different scenarios - from workers working irregular hours to zero-hour contract holiday pay.

Essentially, an employee shouldn’t be paid less while on holiday than when they’re working regularly. But as mentioned before, that gets complicated a little by the type of contract an employee is on.

Holiday pay policy: Further considerations

We’ve talked a little about holiday pay and how to go about calculating this. Now, let’s look at a few other things you should consider from how annual leave entitlement works, to do what do when faced with bank holidays and calculating pay for part-time employees  

Let’s start by breaking down what holiday entitlement actually is and some standard guidance the government provides when it comes to managing workers’ paid time off.

What Is Holiday Entitlement?

Holiday entitlement - also known as annual leave entitlement - is the number of days of paid holiday workers are entitled to in their country, at a minimum. You can read more about it in our full guide on subject

Now, this entitlement will look different from country to country, but the basic premise is the same - if you’re an employee and are contracted to work a certain amount of hours for a company, you have a right to take some time off. 

How much holiday are workers entitled to in the UK?

As mentioned before most workers are full-time and will therefore be entitled to the full 5.6 weeks of holiday or 28 days. Holiday entitlement for part-time workers works a little differently. If an employee only works three days a week, for instance, their entitlement would be 16.8 days, or three days x 5.6 holiday weeks.

What about overtime? How does it factor into holiday pay? 

Overtime does have an impact on holiday pay, though only for the first four weeks of holiday taken. In general, you’ll want to make sure you are accounting for all types of overtime when working out how much holiday pay your employees should get, in addition to commission. Our blog on holiday pay and overtime in the UK explains more.  

Should bank holidays be included as part of holiday pay and entitlement?

The short answer is it’s really up to you as an employer and what you decide to stipulate in your employment contracts. Bank holiday employment law suggests that these can be included as part of your holiday entitlement, and therefore pay, or in addition.

PayFit Top Tip

Regardless of what you choose to do, it’s essential that you understand how bank holidays are worded in your employee contracts, as the number of bank holidays each year can change. For instance, in the case of the Queen’s funeral and the King’s coronation. Some employee contracts may still state 7 or 8 bank holidays, which doesn’t automatically entitle them to take these extra bank holidays off. Find out more about bank holiday employment law. 

holiday pay and entitlement

Make holiday pay a breeze with PayFit

Don’t let holiday pay wipe you out…PayFit automates some of the most complex areas of payroll, including holiday pay, so you can finally put your feet up!

Most payroll software and bureaus fall down when it comes to processing holiday pay. They either refuse to touch it (and we get it; it’s complex!) or don’t have the proper functionality to automate this.

But PayFit automatically looks back up to 104 weeks to retrieve 52 weeks of pay you can use, as confirmed by recent legislation, then calculates the average daily rate for you. It’s all automatic, which means no tricky spreadsheets or manual calculations. Simply switch on the toggle - either at company level or employee level - and the rest is done for you.

Plus, whenever an employee logs annual leave, their payslip gets updated, including the rate used to calculate their holiday pay. So if they take multiple holidays in the same month, they’ll see each different rate that’s been used on their payslip. In addition to this, they can view a breakdown of their holiday pay calculations on their PayFit employee portal. Now that’s smart payroll. 

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