How does rolled-up holiday pay work in the UK?

With new legislation fully active from April 2024, rolled-up holiday pay offers growing UK employers a streamlined, compliant way to manage staff with fluctuating schedules and avoid costly errors.

What is the concept of rolled-up holiday pay?

Rolled-up holiday pay is a practice where the employer includes the holiday pay component within the worker’s regular pay packet, rather than paying it when leave is taken.

This represents a significant departure from the standard practice most UK businesses are accustomed to, where an employee receives their basic salary or wages for the work they do, and then separately receives holiday pay and entitlement at the specific time they take their leave.

Unlike the traditional model, which ensures staff have funds specifically for their time off, rolled-up pay advances these funds in every pay period.

How does the payment structure of rolled-up holiday pay work?

The payment structure of rolled-up holiday works by adding the accrued holiday pay component on top of the worker’s normal hourly wages in every pay period.

Importantly, while the funds are paid together, rolled-up holiday pay must be distinctly itemised. This means that the worker receives an enhanced hourly rate, but the payslip must show both the basic pay and the holiday pay as separate line items.

This separation is vital to prove that the worker has been paid their statutory entitlement. And the result is that the employee will receive their money upfront, meaning they get paid their holiday pay before, and not when they actually take their time off work.

Why do employers use the rolled-up holiday pay method?

Employers use the rolled-up holiday pay method because it simplifies payroll calculations for irregular staff, and provides better cash flow visibility.

For companies managing shift work, hospitality staff, or gig-economy roles, calculating average pay for leave taken at random intervals was historically a headache. Introducing the rolled-up method simplified the process.

Rolled-up holiday pay lines the holiday cost directly up with the hours worked in that specific pay period. This is also particularly helpful when managing casual staff where turnover can be high.

Is rolled-up holiday pay compliant with UK law?

Rolled-up holiday pay is compliant with UK law for eligible workers for holiday years beginning on or after 1st April 2024.

For many years, the legality of rolled-up holiday pay was a grey area that worried many an employer. Following the European Court of Justice ruling in Robinson-Steele v PD Retail Services in 2006, the practice was technically unlawful under case law, though often tolerated if applied transparently. However, the legal landscape shifted significantly with the introduction of the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023.

As we move through the 2026 tax year and look ahead to 2026/27, these regulations have now established the legality of rolled-up holiday pay. Nonetheless, it is critical to note that this legal permission is not a blanket rule for all staff. It applies strictly to those defined as irregular hours workers or part-year workers. Using this method for full-time, regular employees remains legally non-compliant, and carries significant risk under the law.

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Which workers are eligible for this pay method?

The workers eligible for this pay method are specifically defined as ‘irregular hours workers’ and ‘part-year workers’. Therefore, to remain HMRC compliant, you must correctly categorise your staff. The law provides specific definitions for these two groups.

Who counts as an irregular hours worker?

An irregular hours worker is someone whose paid hours in each pay period are wholly or mostly variable under the terms of their employment contract.

This definition often applies to zero-hours contracts, casual staff in hospitality, or agency workers, for whom the number of hours worked fluctuates significantly from week to week.

If a worker has a guaranteed minimum number of hours that is paid regardless of work done, they likely do not fall into this category.

Who counts as a part-year worker?

A part-year worker is required by their contract to work only part of the year. Importantly, there must be a period of at least one week within the year where they are not required to work and for which they are not paid.

This scenario is common in education with term-time only staff, and in seasonal agriculture. Part-year workers are distinct from standard part-time workers, who might work year-round but fewer days per week.

Correctly identifying these employment statuses is the first essential step, before applying any new payroll calculations such as rolled-up holiday pay.

How do you calculate the 12.07% rate accurately?

You calculate the rate by applying 12.07% to the worker’s total statutory pay for the specific pay period. Once eligibility has been confirmed, the next challenge is the maths. Calculating holiday pay correctly is essential to avoid any underpayment claims.

Why is 12.07% the standard figure?

The 12.07% figure is the standard because it represents the statutory minimum of 5.6 weeks’ leave divided by the remaining 46.4 working weeks in a year.

Since the statutory minimum leave entitlement in the UK is 5.6 weeks, if we subtract the 5.6 weeks of leave from the 52 weeks in a year, we are left with 46.4 working weeks.

To find the percentage of holiday pay relative to working time, the formula is: 5.6 divided by 46.4 multiplied by 100 = 12.07%.

This 12.07% figure represents the statutory minimum. However, if your company offers more generous contractual leave than the statutory minimum, among other employee benefits, this percentage must be adjusted upwards to reflect the higher entitlement.

Summary of calculation components

What is a practical example of the calculation?

Consider a worker on an irregular schedule, who, in a specific month, has worked 60 hours at a rate of £15.00 per hour, and they also earned a £100 performance bonus.

1. Calculate total relevant earnings: 60 hours x £15.00 = £900. Added the bonus = £1,000 total taxable pay.

2. Apply the holiday pay percentage: £1,000 / 100 = £10. £10 x 12.07 = £120.70.

3. Total gross pay for the period: £1,000 (Basic + Bonus) + £120.70 (Holiday Pay) = £1,120.70.

The £120.70 figure must appear distinctly on the payslip. This ensures the employer has evidence that accrued holiday has been paid.

Using a reliable, modern payroll solution can automate this calculation, adding the item to an electronic payslip, and helping you ensure that rounding errors do not creep in over the tax year.

How does sick leave and maternity affect calculations?

Sick leave and maternity affect calculations by requiring employers to use a 52-week reference period to calculate average weekly earnings for accrual purposes.

Real-world scenarios often involve absences that will affect the calculations, so the regulations introduced in 2024 also clarified how to handle these situations.

How do you deal with sick leave affecting holiday pay?

When an irregular hours worker is on sick leave, they continue to accrue holiday entitlement. Since they are not working hours to apply the 12.07% to, you must look back at a reference period.

This calculation typically involves taking the average weekly earnings over the relevant 52-week reference period ending before the sick leave began. This ensures the worker does not lose out on entitlement simply because they are ill.

How do you deal with maternity and family leave affecting holiday pay?

Similarly, workers on maternity or other statutory family leave continue to accrue holiday. The new rules stipulate that for each pay period of the leave, the worker accrues annual leave based on the average amount of holiday they accrued during the 52 weeks prior to starting their leave.

This ensures fairness and prevents discrimination against those taking statutory time off. It is vital to seek professional advice or use capable leave and absence management software to track these reference periods accurately, as manual calculations over a 52-week window can be prone to error.

How do traditional vs. rolled-up holiday pay compare?

Understanding the key differences helps in choosing the right solution for your business structure:

What are the risks and future considerations?

The primary risks of using the rolled-up holiday pay method involve misclassifying workers and failing to clearly itemise pay on payslips, which can lead to tribunal claims.

While the reintroduction of this method simplifies life for many businesses, it is not without pitfalls.

What are the potential compliance traps of rolled-up holiday pay?

The biggest risk in using rolled-up holiday pay is worker misclassification. If you apply rolled-up holiday pay to a regular, full-year worker, you will be in breach of the Working Time Regulations. Regular hours and full-year workers must be paid at the time they take their holiday.

A subtle but dangerous compliance trap is ‘status drift’, where a casual worker on an irregular contract settles into a fixed pattern of hours. If their working pattern becomes regular, they may no longer legally qualify for rolled-up holiday pay, making continued use of this method unlawful.

Another risk is lack of transparency. If the holiday pay is effectively bundled into a high hourly rate without being separated on the payslip, a tribunal may decide that the holiday pay was never paid at all. Consequently, you could be forced to pay the holiday amount a second time to settle any claims regarding unlawful deductions.

Summary of the most common compliance traps in using rolled-up holiday pay

What are some considerations on rolled-up holiday pay looking ahead to 2026/27?

As we approach the 2026/27 tax year, the government is expected to continue focusing on workers’ rights and enforcement.

While the law regarding the 12.07% method is now settled, scrutiny on ‘bogus self-employment’ and gig economy rights remains high.

Employers should expect that enforcement bodies will check that ‘irregular hours’ contracts are genuine, and not used simply to avoid standard holiday pay administration.

Using the best payroll software for SMEs in the UK is a strong defence, as it creates a digital audit trail of how every rate and payment was calculated.

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