How to Calculate Holiday Pay For Staff

Calculating holiday pay is a challenge that almost every UK company faces on a monthly basis. 

Working out how much employees are entitled to, especially when dealing with part-time workers, zero-hour contracts, or missing data for that 52-week period, isn’t exactly a walk in the park. In fact, it’s enough to make some HR managers cry out: ‘I need a holiday!’.

The issue is complex, and that’s reflected in the number of employment tribunal cases that have cropped up over recent years, which has led HMRC to reassess how holiday pay should be calculated.

So, how do you calculate holiday pay, especially for different types of employees? We’ll cover it all.

How to calculate holiday pay in the UK 

First, let’s get clear on the different types of employees you might have to calculate holiday pay for. Here, employees and workers fall into two general buckets:

What are the different types of workers you can calculate holiday pay for?

Regular workers - these are people who are on a full-time, part-time or fixed-hours contract - they will generally work a set or ‘fixed’ number of hours every week and would usually be classed as ‘employees’, which means they would enjoy all the rights and benefits afforded under this employment status. 

Irregular and part-year workers -refer to workers on zero-hour or part-year (also known as seasonal) contracts. Typically, these workers won’t have fixed hours. In other words, their hours are variable. These types of workers can be shift workers (such as hospitality or care workers) or could only be contracted to work part of the year, such as farmhands or tour guides. Irregular workers can be either classed as employees or workers. 

Put simply, how you calculate holiday pay will depend on whether you’re dealing with a regular or irregular worker, as there are different laws and methods of calculation for both.

Calculating holiday entitlement & pay for regular and part-time employees is perhaps the most straightforward to understand, so we’ll start here ( and get to term-time and irregular-hour contracts in a bit).  

How is leave calculated in the UK for regular workers?

In the UK, all employees and most workers are entitled to 5.6 weeks of holiday per year.

This is the same, regardless of the number of hours they work during a week. The entitlement is simply the weekly days or hours, multiplied by 5.6. As an employer, you might decide to offer an increased annual leave entitlement, also known as contractual leave, but let's focus on the statutory minimum entitlement for now, and what the new laws say about this.

For the purposes of calculating holiday pay, the statutory minimum of 5.6 weeks is split into two blocks, each with a minimum pay rate. Employees are entitled to four weeks of statutory leave (provided under the EU Employment Regulations) and a further 1.6 weeks under the UK Working Time Regulations

So, if you have a staff member working 5 days a week, this would equate to:

• 1.6 weeks from UK working time x 5 days = 8 days.

• 4 weeks from EU employment regs x 5 days = 20 days.

So that would equate to 28 days (8 days + 20 days). This is the statutory minimum holiday entitlement for regular workers who are full-time.*

*Any additional contractual entitlements are paid at the worker's contractual rate, with a minimum rate of the national minimum wage.

How is holiday pay calculated for regular workers? 

Now, these two blocks of leave attract different payment rates, especially where worker’s pay varies (in other words, they receive overtime and commission payments).

• The four weeks offered under EU law must be paid based on a worker’s normal pay rate (which is based on things like performance, allowances and shift bonuses) . 

• The remaining UK entitlement of 1.6 weeks can be paid at the worker’s basic rate (in other words, their contractual hourly or daily rate of pay). 

The normal rate is based on the pay they would typically receive had they been working. This means that, in addition to the worker's daily or hourly rate, any regular payments must be taken into account, such as:

• Payments intrinsically linked to performance of work: e.g. allowances, shift bonuses, etc

• Payments relating to professional or personal status or qualification: e.g., payments for increased responsibilities or length of service.

• Regular payments in the preceding 52 weeks: this isn't limited to overtime.

Previously, case law specified which different types of payment to include when calculating normal pay. However, the new legislation confirms that all these different payment types can be included, which makes things a lot simpler.

To work out how much holiday pay a regular worker should be paid at the normal rate, you’ll need to:

1. Count back the number of weeks they worked. In Britain, you can look back up to 104 weeks (2 years) to get 52 weeks of data. In Northern Ireland, you can only look back up to 24 weeks to get 12 weeks of data. 

2. Add up what they've been paid for each week worked, up to a maximum of 52 weeks (or 12 weeks in Ireland). You’ll need to exclude any weeks not worked or any weeks when the employee was on statutory sick or parental leave (adoption and carer’s leave are included too in this).

3. Divide the sum from Step 2 by the number of weeks from Step 1

Essentially, an employee shouldn’t be paid less while on holiday than when they’re working regularly. But things get much more complicated when you’re faced with scenarios that look different from the traditional 28-day entitlement. Here, employment law isn’t as straightforward and, in fact, can be a downright minefield, with individual interpretations of rulings differing from case to case.

Fortunately, the new laws and regulations for holiday pay have simplified some of this, though it can still be tricky to calculate holiday pay, especially for irregular workers.  

How do you calculate holiday leave and pay for irregular workers?

For irregular workers, the new legislation changes now allow for their holiday pay to be calculated either one of two ways - you can either have them accrue a bank of annual leave entitlement or pay their holiday pay in each pay period using the rolled-up holiday pay method. 

The accrued annual leave method 

if you decide to use this first method, your worker would build up a bank of leave they're entitled to, just like a regular worker would.

Typically, this would be a percentage of the hours they work during a given pay period. Normally this percentage would be 12.07%, though it could be higher if you offer them more than the minimum statutory entitlement.

Calculating this entitlement is quite simple, but things get more complicated if that worker takes statutory sick or parental leave. If this happens, you'll need to work out the average hours they've worked over the previous 52 weeks, including any weeks when they didn't work.

You can see an example of how to calculate holiday pay for a zero-hour contract using this method.  

And If you calculate holiday pay in this way, then you'll only pay it when that worker takes their annual leave or when they leave employment.

The rolled-up holiday pay (RHP) method 

The second method, which is also known as accrued holiday pay,, was once outlawed by the European Court of Justice. But the new legislation clarifies this and makes clear that rolled-up-holiday pay RHP can now be used lawfully again.   

Using this method, workers receive holiday pay on each payslip. They won’t be paid holiday pay when they take their annual leave, so budgeting their pay becomes essential when using this method. You also need to make sure they still take their minimum holiday allowance. 

Similar to the first method, when working out RHP, the worker will accrue this pay at the same percentage we shared above (or higher) of the total pay they earned that pay period. But if they take statutory sick or parental leave, you'll need to work out their average pay instead. In this case, it's calculated as the average of their pay over the previous 52 weeks, but this time excluding the weeks when they didn't work.

With both these methods, leave is paid at the worker's 'normal rate'. This is different from regular workers, who only need to be paid the 'normal rate' for a proportion of their annual leave entitlement (as we learned above).

You can see several examples of rolled up holiday pay calculations in this more in-depth post.

Holiday pay calculation in the UK: other scenarios

Let’s go over a few of the most common scenarios you might run into when calculating holiday pay in the UK and how to handle each. 

When in doubt, use the pay reference period

The pay reference period is the last 52 weeks  (or 12 weeks in the case of Ireland) we referred to before when talking about regular workers. It’s the length of time an employer must look back at an employee's variable earnings to determine the correct average pay for annual leave. To correctly calculate the pay reference period, employers must take the 52 paid weeks and divide all earnings in that period by the total number of hours that an employee has worked. This figure can then be used to calculate an employee's holiday pay.

Even if an employee's pay rate does not vary from pay period to pay period, it’s worth adopting this approach for all regular workers. It can also come in handy when irregular workers go on leave and it’s tricky to determine their weekly pay otherwise. 

How to calculate holiday pay for part-time employees

Holiday pay for part-time workers, or pro rata holiday entitlement is based on the same principle as entitlement for full-time employees, just adjusted for the amount of the holiday year they’ve worked. 

So if you have a worker that works the same amount of hours every week, just part-time, their holiday entitlement would be 5.6 times the hours or days they work in a week, and their pay adjusted accordingly. 

Learn more about holiday entitlement for part-time workers.

Employees who haven’t been working the last 52 weeks

Now, there might be times when an employee or worker has been on long-term sick leave or, for whatever reason, hasn’t been working the last 52 weeks. Or you might be dealing with a newly onboarded employee who hasn’t yet worked a full 52 weeks. 

In this situation, there are a few factors to consider:

• When calculating holiday pay for someone who’s been off sick, you can work backwards (but no further than 104 weeks) and use remuneration figures for a maximum of 52 working weeks.

• For new joiners the last 52 weeks, there may not be enough data for a full 52-week average calculation. In this case, you can pro rata their holiday entitlement. So, for example, if they’ve worked 20 weeks, work out their average pay over those 20 weeks.

Fixed hours, but irregular pay 

Some workers on fixed-hour contracts might get overtime, commission and bonuses, some of this being ‘regular’. 

These can present some of the most complex cases when working out how much is holiday pay because organisations often run into issues when defining what’s considered ‘regular’ with this type of pay. 

In other words, you should only really be including ‘regular’ overtime as part of your calculations that’s been paid out the last 52 weeks. Overtime once every few months or so, doesn’t really count, but when it’s on a regular, almost monthly basis, then it does. As an employer, it can be tricky to draw a line in the sand, so it’s important that you use your judgment here to figure out what’s ‘reflective’ of that employee's situation. 

As with the other examples in this list, you’d add up that employee’s remuneration over the last 52 weeks, including any regular overtime, bonuses or commissions and divide that by 52 to work out their ‘normal’ weekly pay. 

If the last 52 weeks look a bit abnormal in terms of additional pay they’ve received, you can always look to use a different pay period, but this is something you’ll need to work out with the employee. 

Fixed hours, but different hourly rates of pay

This applies especially to shift workers where different shifts can often lead to different rates of hourly pay. In this case, your holiday pay calculations will look slightly different.

• Add together the employee’s total remuneration for the last 52 weeks worked (regular overtime, commissions and bonuses included) and then divide this figure by 52 for average weekly pay.

• If you want to figure this out based on hours, use total working hours instead over that period and divide by 52 for the average weekly hours.

• Divide the average weekly pay by the average weekly hours to get the average hourly rate of pay.

• You can then use this rate to calculate their holiday pay. 

Fixed hours on a piecework basis

A less common working arrangement, though one you may still run into, is that of an employee getting paid for the number of tasks they complete. In this situation, you’ll want to work out the average hourly rate and multiply that by the number of hours holiday taken to get their holiday pay. 

Holiday pay cases in law 

There have been several cases in recent years that have looked to highlight the issues surrounding holiday pay. 

Lock vs British Gas 

One of the most prominent was Lock vs British Gas. The dispute centered on Mr Lock, a sales consultant for British Gas, who claimed that he was owed money on the basis that his holiday pay was not reflecting what he would have earned from the results-based commission. 

The Court of Appeal’s ruling in October 2016 stated that holiday pay must include compensation for any results-based commission that would have been ordinarily earned by a worker. 

Bear Scotland vs Fulton

Another prominent case regarding holiday pay is Bear Scotland v Fulton. 

Mr Fulton claimed that Bear Scotland Ltd had made unjustified deductions from his wages by not including overtime and other payments associated with his work in calculating holiday pay due to him. 

The courts agreed, and the Employment Appeal Tribunal (EAT) ruled in November that 2014 that regular overtime, which employees are required to perform if requested to do so by their employer, should be included for holiday pay purposes. 

Harpur Trust vs Brazel 

The Harpur Trust v Brazel was another significant case. The court ruled that holiday pay for staff employed to work only part of the year should be calculated using an employee’s average earnings over a 12-week period and not pro-rated.

PayFit makes holiday pay calculations a doddle

Holiday pay can be confounding, but with PayFit, you can make it easy.

Most payroll software and bureaus don’t cover calculating holiday pay - they often exclude it from their packages or don’t have the proper technical infrastructure to automate this.

With PayFit, you can instantly look back up to 104 weeks to retrieve 52 weeks of pay you can use. Our platform then calculates the average daily rate for you. No more combing through spreadsheets or performing calculations by hand; simply switch on the toggle - at the company level or employee level - and we’ll take care of the rest!

Plus, we offer a suite of features to empower employees to manage their leave - so they can log it and watch their payslips update in a flash. Leave and pay becomes more transparent as employees can view breakdowns of their calculations and rates in their PayFit employee portal.