How to calculate holiday pay: your headaches solved

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With the changes to holiday pay legislation and calculations that were introduced in January 2024, and came into effect from April 2024, it just got lots easier to calculate holiday pay.  

Didn’t it?  

Well, yes, for some, this is definitely the case. But the changes don’t apply to everyone. Some – whose holiday year started between 1 January and 31 March – will need to wait until January 2025 until the changes take effect. Others, due to the type of worker/employee they have, need to carry on as before. 

Here we’re going to look at the new rules when it comes to how to calculate holiday pay, and who can and can’t use them. 

In this article

The rules on holiday pay entitlement 

The first step is to understand the rules around holiday pay entitlement. 

Under the Working Time Regulations (WTR) employees are entitled to 5.6 weeks annual leave. This entitled comes from two sources:  

  • Four weeks under EU law 
  • A further 1.6 weeks under UK legislation 

Statutory paid holiday is capped at 28 days per year. An employer can choose to include public/bank holidays in this number, or to give them in addition to the statutory minimum.  

How this works for each organisation should be explained in the company handbook or in individuals’ contracts. 

In theory, these entitlements – and any additional occupational or company holiday – can be paid at different rates. 

Next, we need to consider the ERA’s (Employment Rights Act 1996) requirement to exclude zero pay weeks and weeks of statutory leave from the earnings calculation.  

That’s where things become a bit more complex.  

How average weekly earnings are calculated 

The calculation of the average weekly earnings has been problematic for years. 

Before April 2020, this was based on a 12-week earnings average, excluding zero pay weeks (and still is in Northern Ireland). The average would have been required under the ERA to be based on earnings (paid or not) that relate to work up to the Saturday before the leave was being taken. 

From April 2020, the calculation under the ERA changed to a new 52-week average earnings, excluding zero pay weeks, taken over a maximum of 104 weeks. In practice, this means that the average had to be taken over a period that crossed multiple tax years. This causes challenges around the availability of the required data. 

The changes to how to calculate holiday pay introduced in 2024 do not change how average weekly earnings are calculated. The 2024 holiday pay changes only apply to irregular hours or part-year workers. 

What’s included in the average weekly earnings (AWE) calculation? 

Now that’s cleared up, we need to consider what pay should be included in the average earnings calculation. There are differences between: 

  • EU law (four weeks’ leave) 
  • UK legislation for the additional 1.6 weeks 
  • Any additional occupational or contractual entitlements 

 Again, in theory, each of these types of holiday leave can be paid at a different rate. The WTR is the minimum requirement. 

 The four weeks’ leave granted under EU law must be paid at the AWE rate, including additional earnings such as bonus, overtime and commission, calculated over the 52 worked weeks.  

 The additional 1.6 weeks’ leave granted under UK law can be paid at a basic pay rate.  

Any leave available over this 5.6 weeks (capped at 28 days) can be paid at a rate determined by the company. 

 Many organisations pay all their holiday allowance at the same rate, but not all. And if they do split the payments out, keeping records becomes even more critical so that they are able to prove compliance in any audit, or to defend themselves against any claims for additional pay.  

January 2024 changes to how to calculate holiday pay 

From 1 January 2024, employers have an option for some workers and employees to use a different method of calculation of pay of holiday entitlement, effectively a ‘rolled-up’ holiday pay rate. 

This is only applicable where the company holiday year commences on or after 1 April 2024. This means that for any employers whose holiday year begins between 1 January and 31 March 2024, the new options are delayed until 1 January 2025 (eg. where holiday years run from January through December). 

This new law allows employers to apply one of two optional schemes, but only to employees and workers that can be classified as irregular hours or part-year workers. 

This brings new options: 

  • 12.07% method of holiday entitlement hours accrual with rounding, or 
  • 12.07% method of Rolled Up Holiday Pay (RHP) 

This is unlikely to be the same as the 12.07% calculation that was used by many employers. The new rules don’t remove the need for average pay calculations because they still have requirements to allow for periods of parental leave and sickness. 

New accrual basis for holiday pay 

For irregular hours and part-year workers where holiday years began on or after 1 April 2024: 

  • A round up/down of holiday hours accrued in a pay period based on all hours worked 
  • The hourly holiday pay rate is a 52-week rolling average of earnings divided by hours worked to obtain the holiday hourly rate 
  • Sickness and statutory leave will use a 52-week rolling average of the holiday accrual amounts to calculate a value to accrue during these periods 

New rolled-up holiday pay basis 

There is an alternative to the accrual for irregular hours and part-year only workers, where holiday years begin on or after 1 April 2024. 

A top-up payment of Rolled Up Holiday Pay (RHP) can be used. This is a minimum value of 12.07% pay top-up for each period, based on all earnings. 

Where there is a period of sickness or statutory leave, a 52-week rolling average of the previous RHP amounts is to be paid as a top-up.  

The new method requires all worked hours and all earnings to be included, including commission, overtime, allowances, etc. 

The new changes bring in protections for those who are sick or on any form of statutory leave such parental leave. 

The ‘old’, or previous, use of 12.07% as RHP provided no such protection. This meant employers could easily stray into potential areas of discrimination. 

The new rules bring in protections using the familiar 52-week average hours or average rolled-up holiday obligations. 

So even with the 12.07% top-up, we haven’t lost the requirement to use a rolling 52 weeks of historic information. 

How to calculate holiday pay 

There are multiple steps to take before you can begin think about calculating the actual holiday pay.  

1. Establish which period equates to a week 

For calculating holiday pay, a week usually runs Sunday to Saturday. But an alternative seven-day period can be used – eg. Thursday to Wednesday – only if that's how the employee's pay is calculated. 

An employee's holiday pay should be calculated from the last full week that they worked. This can end on or before the first day of the employee's holiday. 

2. Identify different employee working patterns 

The method of calculation will depend on the worker/employee’s working pattern, so next we need to determine that. 

Fixed hours 

If an employee's working hours do not vary, their holiday pay will be calculated using their usual pay rate and it doesn’t matter if they are full- or part-time.  Under the new legislation of 2024, the ‘normal’ rate of pay for the first four weeks must now include commission payments, as well as any payments for professional status, seniority, length of service, professional qualifications and overtime that has been regularly paid in the previous 52 weeks. 

The remaining 1.6 weeks can be paid at the ‘basic’ rate of pay. 

Irregular hours (IH) and part-year (PY) workers 

You must identify these workers, because there are different rules for them where the holiday year begins on or after 1 April 2024.  

For these workers, the holiday entitlement is calculated on all remuneration in the period – not just the elements listed for ‘normal’ average pay. This calculation must be used for all 5.6 weeks. 

Employers can implement this ‘rolled up’ holiday pay, but it must be paid in the pay period in which the worker is paid for the hours. It cannot be held back and paid at a time requested by the worker.  

Where the employer’s holiday year starts between 1 January and 31 March 2024, this change will not come into effect until their 2025 holiday year. 

Once the new rules can be applied, workers’ holiday entitlement can be measured in hours, and can be accrued at the rate of 12.07% (or any higher rate the employer chooses to use) of the hours worked in a pay period. 

In the first year of a job 

In the first year of their job, an employee may be able to take paid holiday before they've 'accrued' it, but this must be agreed with their employer.  

What must be included in holiday pay? 

By law, holiday pay must include: 

  • Payments linked to doing tasks required in the contract – for example, commission 
  • Payments related to professional or personal status, for example for length of service, seniority or professional qualifications 
  • Other payments – for example overtime payments – if an employee has regularly been paid these during the last year. This includes, but is not limited to, contractual overtime 

Employers must include any relevant payments in at least four weeks of holiday pay. 

Some employers might include these payments in the full 5.6 weeks' paid holiday (statutory annual leave), but it’s not required, they can pay basic salary for the additional 1.6 weeks and any additional occupational/contractual leave the worker is entitled to. 

Rolled-up holiday pay (where an employer spreads holiday pay over the year, by adding a ‘top-up’ hourly rate each period) is still not permitted (although that’s not to say it’s not done) unless the worker is covered under the new rules for irregular hours workers and part-year workers. 

Irregular and part-year worker categorisation 

  • Workers are classified as ‘irregular hours’ workers if the number of hours they work in a pay period is often or always different 
  • ‘Part-year’ workers are those where there are periods of at least a week in a leave year where they do not need to work and are not paid. Note: this does not include term-time workers who have their salary paid over a full 12 months 

Compliance with holiday pay regulations 

To make sure you comply with the changes and the holiday pay regulations, you should  

  • Identify your leave year and when new rules will apply to you 
  • Identify the different categories of workers, specifically those who are IH or PY workers 
  • Determine if all the weeks of holiday pay are to be paid at the same rate, or if you will use different rates for the first four weeks, the 1.6 weeks and/or any additional company leave above 5.6 weeks 
  • Review the items of pay that are to be included in the calculations 

How to calculate holiday pay: summary 

Holiday pay law is subject to many interpretations and almost no two employers calculate and pay it in the same way. As with many complex legal situations, these changes will impact employer scheme rules and potential employment contracts. 

Holiday schemes years need to be specified and configured within your payroll software to identify the relevant hours, earnings and type of workers.  

Remember, the purpose of holiday pay is to ensure that the worker is not worse off as a result of taking their statutory annual leave. For more information about holiday entitlement and pay, visit the government website. 

We can help you stay compliant with holiday pay regulations. Get in touch to see how. 

 

About the author

Claire Warner FCIPP is Ciphr’s regulatory analyst, and one of our team of payroll experts. She says: “Having ‘fallen’ into payroll like so many others, I’ve worked in the profession for over 40 years in multiple roles. This includes running payrolls in various industry sectors and working with software houses to develop software and implement systems for client. I’ve also designed and delivered professional training and qualifications, and sessions, conferences and webinars on various payroll-related subjects. I now use this knowledge and love of payroll and the legislation that impacts it to help guide, inform and support others within the profession.”