Understanding Rolled-Up Holiday Pay in 2024: A Breakdown for UK Employers

Perhaps no other payroll subject is as misunderstood as rolled-up holiday pay. 

This is particularly true in 2024 in light of new holiday pay legislation in the UK. 

Still, HR teams managing irregular and part-year workers will know all too well the confusion that can arise around this heavily-debated topic. Is rolled-up holiday pay even legal? And what should businesses keep in mind when using this method of calculation?

Let’s take a closer look at what is known as the 12.07% percentage method and how businesses should treat it. We’ll also cover what the new rules for holiday pay are in 2024.

What is rolled-up holiday pay?

In the UK, most businesses will be familiar with the practice of paying holiday pay separately from an employee or worker’s basic pay. With rolled-up holiday pay, however, you include that holiday pay as part of a worker’s hourly wage (instead of paying it separately). 

In other words, you basically ‘roll up’ both forms of pay together in a nice little bundle (though each form of pay will be included as a separate line item on payslips). That means, instead of getting their standard wage, your workers will be paid an enhanced hourly rate to make up for the fact they’re not getting separate pay for days off. 

Essentially, your team member should end up being paid the same; it’s just a different method of pay. 

Is rolled-up holiday pay illegal in the UK?

An age-old question that has plagued many an HR department...is rolled-up holiday pay legal? Or is it not? 

To answer this question, we need to go back to 2006, when the Robinson-Steele v PD Retail Services case was going through the European Court of Justice. Following that case’s verdict, the practice of rolling up holiday pay technically became unlawful in the UK. However, new rules for holiday pay, notably the introduction of the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 in January, means the practice is now legal again. 

This means that employers are now allowed to calculate holiday pay using the percentage method from the beginning of their next holiday year (on or after April 2024). For most businesses, this will be from January 2025, when most holiday allowances reset. 

It’s important to note, however, that rolled-up holiday pay can only be used for irregular hour or part-year workers (and not regular workers). 

For context, here’s how irregular hours and part-year workers are defined in the UK: 

• Irregular hours worker - An irregular hour worker is someone who works a certain number of paid hours in a pay period. These hours can be variable, and their terms are stipulated in their employment contract. Care and hospitality workers are examples of jobs that are usually performed on an irregular-hour contract. 

• Part-year worker – As suggested by the name, this type of worker is only required to work for part of the year. Again this will be made clear within their employment contract. These workers are neither full-time nor part-time workers and need to not be required or paid to work for at least a week. Farmhands and tour guides are examples of workers who are typically on part-year contracts.

What is the statutory holiday entitlement in 2024?

As a reminder, in 2024, statutory holiday entitlement remains at 5.6 weeks of paid holiday per year, which is equal to 28 days for someone working five days a week. This includes bank holidays, and part-time workers are entitled to a pro-rata amount.

How do you calculate rolled up holiday pay?

Calculating holiday pay is no easy feat, and where the percentage method is involved, it can seem a little trickier.

What is the rolled-up holiday pay percentage?

Typically, rolled-up holiday pay is calculated at a rate of 12.07% (which is the statutory minimum for annual leave entitlement) on top of a worker’s usual hourly wage rate. 

This percentage comes from the 5.6 weeks of holiday entitlement full-time employees get per year, which is then divided by the 46.4 weeks they actually work. (52 weeks - 5.6 weeks). But like most things in payroll, there’s a neat little formula you can use to calculate what this rate would be under different circumstances. 

What is the formula for rolled-up holiday pay in the UK?

Let’s say you wanted to calculate rolled-up holiday for an irregular or part-year worker who is getting 28 days of holiday. They’ve worked 56 hours and their basic wage is £18.73/hour (plus they’ve received a £500 bonus) The calculation would look like this:  

Entitlement: 20 days + 8 bank holidays = 28 days 

Weeks: 28 days / 5 days = 5.6 weeks

Remaining weeks: 52 weeks in a year - 5.6 weeks entitlement = 46.4 weeks

Rolled-up holiday pay percentage: 5.6 weeks / 46.4 weeks x 100 = 12.07%

Once you have the percentage, you can calculate that staff members rolled-up holiday pay by dividing the amount they’ve been paid by 100 and then multiplying by 12.07. By doing it this way, you can round the number part-way through the calculation, which is what HMRC recommends in their guidance in order to get a more accurate pay (and avoid under or overpaying your worker). 

Hourly pay: 56 hours * £18.73 = £1,048.88

Company bonus: £500

Salary sacrifice contribution: £50

Total pay: (£1,048.88) + £500 - £50 = £1,498.88.

Rolled-up holiday pay calculation:

£1,498.88/100= £14.9888 (rounded up/down to nearest penny), £14.99

£14.99*12.07= £180.9293 (rounded up/down to nearest penny), £180.93

So there rolled-up holiday pay for that pay period would be £180.93

It’s important to re-iterate that the 12.07% is based on the statutory entitlement. This means that if you offer your workers more thant this statutory minimum, you’ll need to use a higher percentage to calculate their holiday entitlement. Don’t forget that within your company, you might have some workers with a higher entitlement than other workers.  

So, are there any risks to using rolled-up holiday pay?

We’ve established that holiday pay is no longer illegal in the UK for irregular hour or part-year workers. However, there are still some risks businesses need to consider when using this method to calculate holiday pay. 

For one, if the calculations aren’t done correctly, this could lead to potential claims against your business. If workers receive too little (or too much) holiday pay, then workers can take you to court. They could also raise a grievance against your business. All of this can take up time and space, especially if it’s not handled sensitively or correctly. 

Workers may also feel that they’re being blocked from taking holidays and may seek ‘just and equitable’ compensation. In this case, you could end up having to reimburse an employee for both their rolled-up holiday pay and compensation. 

What are the changes to holiday pay in the UK for 2024?

Rolled-up holiday pay is one of a few changes the government rolled out this tax year that have modified annual leave calculations. These amendments were published back in November 2023, and the full legislation came into effect on April 6th 2024, which included:

What is holiday pay accrual in the UK?

Holiday pay accrual refers to the way in which employees earn holiday entitlement over time. In a traditional system, as employees work throughout the year, they gradually accrue time off that they can take as paid holiday. Understanding how holiday pay accrues is essential for planning and payroll processing.

Make holiday pay calculations easy-breezy

PayFit automatically calculates holiday pay for all regular workers as well as providing detailed step-by-step breakdowns for all holiday pay calculations. So, you can see exactly how any holiday figure was arrived at. On top of this our payslips show calculated holiday rates. 

Plus, get answers to any payroll query you have by browsing our useful Help Centre articles or by getting support from one of our payroll specialists. It’s all provided through our comprehensive plans and packages.