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What Is Holiday Pay Software, and How Does It Work?

Oli Robertson
Last updated on August 24, 2023

Calculating and ensuring holiday pay is reflected correctly across your business’ payroll can be a challenging task. This is especially the case when dealing with those who don’t work a fixed amount of hours, or whose pay fluctuates as a result of commission, bonuses or overtime payments. Having to do this every month, across a business with lots of employees and workers, has traditionally been a complex and manual undertaking.

This is where holiday management software (or holiday pay software) comes into play.

Whilst a lot of payroll software doesn’t calculate holiday pay as standard, there are some that do, or that include a holiday pay module as part of the package.

Calculating everything correctly is essential, not only to ensure those who undertake work for you are paid the right amounts, but so that you remain compliant with your tax requirements and HMRC. 

Holiday pay software can help HR teams perform the all-important 52-week average pay calculation automatically, so let’s find out a little more about it.

What is holiday pay software?

Holiday pay software (sometimes referred to as holiday management software) is any software that calculates holiday pay. It can be purchased either as a standalone solution, or more commonly as part of a broader HR or holiday pay compliant payroll software package. 

Typically, holiday pay software automatically calculates workers’ 52-week average weekly earnings and, where the typical sync with payroll software is present, ensures this is reflected in payroll runs and that everybody is paid the correct amount. Where the package leans more on the holiday management software side - that’s used more to keep track of and coordinate days off for staff members working different hours - your calculations will still be automated, but you may have to add the amounts to your payroll yourself.

In essence, holiday pay software simplifies holiday pay processes. It removes the need for complex, time-consuming and manual calculations, and is something that will typically integrate or sync with your payroll system to ensure those calculations are reflected accurately in pay runs.

What are the advantages of holiday pay software?

The main advantages of holiday pay software revolve around time (and stress) savings for you and your team. Gone are those hectic month-ends spent manually calculating holiday pay across the whole business; gone are sleepless nights worrying if you’ve paid your irregular or part-time hours staff correctly for their holiday; and gone are the worries around whether or not you’re paying the correct amount of tax and National Insurance to HMRC, and the consequent risk of incurring a fine or penalty.

Most holiday pay software can automatically calculate holiday entitlement for part time workers and ensure everything is paid out correctly. Some even calculate average daily pay rates over the course of a 52-week period to correctly attribute holiday pay to those on irregular hours.

And holiday pay software that syncs up with your annual leave portal enables staff to record their leave requests, and have this reflected directly in their payroll for increased transparency between staff and managers.

holiday pay software

What common features does holiday pay software have?

The core features of holiday pay software centre on automation and flexibility - automation in the sense that calculations around average weekly pay are taken care of, flexibility from the perspective of being able to choose what is and isn’t included in that 52-weekly average. This could include ad hoc or one-off payments, or a particular period within that time frame when the member of staff in question wasn’t working for an extended time. 

When purchased as part of a holiday pay compliant payroll software package, additional features will come into play. These may include automated RTI (Real Time Information) submissions, meaning all your company pay information is submitted to HMRC on time each month. Many providers also integrate annual leave management functionality, meaning that any validated holiday requests are reflected automatically on employee’s payslips and the correct salary is paid each time.

How can I ensure I choose the right holiday pay software for my company?

Choosing to invest in any new software is a big decision. There’ll always be a bedding-in period where things might not go as smoothly as hoped, but if done well the investment can have a significant and positive impact on the entire business.

There are four key steps to follow when choosing a new holiday pay software provider. Addressing these should ensure that you find the right software for your business.

Review your current holiday pay and wider payroll processes

Evaluating what is and isn’t working every 12 months or so is a great starting point, as this will help you understand what your new software needs to help you improve. 

Calculating holiday pay, and administering payroll and leave in general, is a complex process, so it’s important that you choose software that will automate and simplify the process as much as possible.

Decide what your company needs from holiday pay software

Making a list of what your company needs to get out of holiday pay software is the next logical step, based on the improvements that you’ve identified as a part of your earlier review. 

A common complaint of HR leaders is the amount of time taken to administer payroll and holiday pay every month manually. Whilst most holiday pay software aims to automate and reduce the time taken, there will be particular features of different software packages that are more closely suited to your business specifically.

Ask yourself if you’d benefit the most from automation, or if you need the software to sync with your existing set-up, for example payroll, annual leave management or accounting software. Think about whether or not the software in question will improve a particular process within your business, or if it will provide the reporting capabilities to ensure you can access all of the holiday pay and leave data points you’re looking for.

A lot of holiday pay or payroll software providers offer just that - software. But then there are some that are able to provide dedicated support from subject matter experts. If you’re in a small or mid-sized business, without a dedicated team focused on payroll, it’s likely you’ll need support at some point, so assess what level you will need in deciding which software to go with.

Weigh up cost vs. value

It sounds like an obvious one, but weighing up cost and value is something that many decision makers don’t quite nail - they look too heavily at simply the cost. But when it comes to payroll, and calculating holiday pay specifically, it’s important to understand just how much time you or your team spend calculating and processing everything each month. It might cost a little more to go with a new holiday pay solution rather than doing it all yourself, but does the additional cost help alleviate the stress, reduce the time spent correcting mistakes and eradicate the risk of HMRC fines as a result of an incorrect submission? Most likely, yes.

Ask the important questions

The process that we’ve covered above should be all about asking certain questions of your team, processes and requirements. Aside from some that we’ve already alluded to, here are a few more that you should be sure to ask prospective software providers when getting demos from them.

  • how much does it cost?

  • is it easy to use?

  • does it integrate or sync well with other software?

  • is it HMRC compliant or recognised?

  • what reporting capabilities does the software provide?

  • can employees use it to record their leave as well?

  • what level of support can be offered?

  • can it be customised to my business’ needs or is it a purely ‘out-the-box’ solution?

If you can answer ‘yes’ or ‘lots’ to a good number of these, then you could be onto a winner in terms of holiday pay software.

How do I set up holiday pay software?

Any holiday pay software worth its salt will offer a thorough onboarding process to ensure that your new software is fully embedded into your organisation and its processes. A key part of the process will be to train your team in the new software, so all the key players can get the maximum benefit from it. This is something that can usually be taken care of by the provider.

However, any training for other staff members who will use the software, for example to request leave in the platform, will most likely have to come from admins (i.e.: you). It is important that all users feel comfortable and empowered to use holiday pay software to benefit not just the HR or finance team, but the whole business as well.

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