How to calculate holiday pay

Calculations such as those that are used to work out how much an employee should be paid are essential for running your business. but it’s certainly fair to say that they aren’t always simple. Especially if maths wasn’t your favourite subject at school.

While the government provides multiple examples of how to calculate holiday pay, there’s always exceptions to the rule. Making it complicated in instances such as when an employee works irregular hours or has worked overtime.

In this article, we aim to clear some of the confusion surrounding holiday pay, making sure you know exactly what to do and how to do it, no matter the situation.

What is holiday pay?

Holiday pay refers to the rate of pay a worker receives during their annual leave. As explained by UK employment law, By law, there is a difference in the amount that must be paid for the 4 weeks of normal entitlement vs the 1.6 weeks of additional entitlement. Most employers choose not to differentiate but they aren’t required to. 4 weeks must be at ‘normal’ pay, 1.6 can be at basic.

The rate at which you pay usually depends on the worker’s regular hours and should be calculated for each person.

The calculation can be done using a workers shift pattern using either:

• Days worked per week

• Hours worked per week

• Irregular and casual hours

• Shifts

However, you may also have to consider other factors such as overtime, commission, bonus payments, any additional skills payments or length of service payments, which may need to be included in an employee’s holiday pay.

How do you calculate holiday pay?

Calculating a worker’s holiday pay depends on their regular pay.

This is easy to work out for those on fixed pay, and regular hours for example, full time employees. Their holiday pay would be the same as what they earn in the same period while working.

However, things start to get more complicated when you consider those with different types of employment contracts, such as a variable hours contract.

Calculating a week’s pay for different types of workers

Working out how much to pay for a week’s worth of work will of course differ depending on the hours or shifts the worker typically works in a week. When an employee regularly changes their shifts, this becomes more difficult.

UK businesses can use the method known as the ’52-week period’ to calculate pay for those workers whose hours fluctuate each week. The alternative would be to use RHUP (rolled up holiday pay).

Below is an explanation for different types of workers:

• Full-time fixed hours/pay - Worker’s usual pay for a week

• Part-time fixed hours/pay - Worker’s usual pay for a week

• Shift worker on regular hours - The average pay rate over the last 52 weeks as per the average number of weekly fixed hours the worker has worked

• Irregular-hours workers (including part-year workers) - As of April 2024, the rolled up holiday pay method can be used for workers on irregular hours 

Rolled-up holiday pay (RUHP) for irregular hours workers  

In early 2024 the government introduced several reforms helping to simplify holiday entitlement and holiday pay calculations.

In the Working Time Regulations, rolled-up holiday was implemented as a method of calculating holiday pay for workers on irregular hours or for workers who work for part of the year (irregular/casual workers and part-year workers).

The reforms now mean that workers on irregular hours will accrue annual leave to a total of 12.07% of the hours worked and pay received in a pay period.

When making this calculation you must consider any other payments including commission payments, payments for length of service, and other payments such as overtime pay.

For example, if a casual employee has earnt £1000 in one pay period, they will receive £120.70 worth of rolled-up holiday pay.

The rules state:

• Rolled-up holiday pay must be listed separately on a payslip

• Communicated to the employee (included in contractual documents)

• Paid at the same time as the worker is paid for work completed (workers can take their statutory annual leave entitlement, they just won’t be paid at that time)

How do you calculate accrued holiday pay?

The Working Time Regulations entitles all workers to the UK statutory leave of 5.6 weeks a year. However, you decide how time off is allocated.

You can choose to use a holiday accrual system instead of allocating the full leave allowance upfront.

Holiday accrual means workers annual leave allowance becomes available to them gradually throughout the year of employment.

You’ll need to know how accrued holiday pay is calculated if you use this system.

The holiday pay accrual calculation is simple. Take the relevant calculation, either regular or variable hours, and divide their holiday allowance by 12 for a monthly figure. Then multiply this by the number of months worked. You may need to round up to complete full days or offer half days.

As workers accrue annual leave right up to the end of the year, some workers might end up with unused leave. You need to make sure your staff know what will happen if they don’t use their time off.

You will also need to pay for accrued unused holidays when an employee leaves your business.

How to calculate holiday pay including overtime

A worker might be on a fixed hours contract, but you might need to consider overtime in their holiday pay.

The Working Time Regulations outline that holiday pay should mirror the amount that a worker usually receives. And if you offer regular overtime, it should factor into your calculation via the 52-week average method.

Calculating holiday pay on termination

Terminated workers are entitled to be paid in lieu of any accrued annual leave they haven’t taken.

You’ll need to know how to calculate holiday pay owed and the amount of accrued annual leave up to the date of termination, including their notice period.

The formula for calculating this payment is (A x B) - C, where:

• A is the total annual holiday entitlement.

• B is the fraction of the year up to the termination date.

• C is the amount of holiday already taken.

This will leave you with the amount of annual leave the worker has accrued but not taken.

Then use the relevant holiday pay calculation for either fixed or variable hours to work out what you owe.

Manage annual leave and get support from BrightHR

While holiday pay and calculations can seem like a minefield—it doesn’t have to be!

At BrightHR we can support and simplify the process for you.

With our staff holiday planner, you can centralise your annual leave management and save yourself time with automatic annual leave calculations. Plus get peace of mind on holiday entitlement laws with support from our HR experts with BrightAdvice. If you’re struggling to get to grips with holiday pay for your employees, get in touch for legal advice and HR assistance.