How to calculate holiday pay
Post Author:
Rona Burns
Date Posted:
November 3, 2022
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Over the last few years, the way in which Holiday Pay is calculated has become a more complex process for non-salaried staff due to changes introduced by HMRC in April 2020.
All employees are entitled to a minimum 5.6 weeks of annual leave each year. This starts to accrue on the first day of employment.
This includes the following:
- Agency workers
- Staff with zero hours contracts
- Staff who work irregular or variable hours
- Full and part time salaried staff
Staff continue to accrue annual leave when they have time off for sick leave, Maternity, Paternity, Parental and Adoption leave.
Different working patterns may require different calculations
Depending on the contract type or working pattern the calculations may differ between employees and should be looked at on an individual basis.
Fixed Days/Hours
For an employee who works 5 days a week, their annual leave would be calculated on 5 days per week x 5.6 weeks per year = 28 days per annum.
For an employee who works 9 days per fortnight, the simplest calculation would be 4.5 days per week x 5.6 = 25.2 days per annum.
There are lots of different types of working contracts and patterns but if you apply the 5.6 weeks calculation, this will ensure you are compliant.
Where the annual leave entitlement is more than 28 days, the 5.6 weeks calculation should be adjusted.
Casual/Irregular/Zero Hour contracts
These employees also accrue their annual leave at 5.6 weeks per year pro rata.
The way in which these holiday hours are calculated is a little more complex.
If an employee does not work regular hours their holiday hours have to be calculated on an average of what has been worked.
Employers should only consider the last 52 weeks worked (not including any periods of absence, unpaid leave or SMP) and take an average of this period. Employers can refer back to 104 weeks to find hours to include in the calculations.
Where an employee does not have 52 weeks service, you should use the hours worked since employment started.
For workers who only work for a limited period i.e., 3 months, then the holiday pay is pro- rata of time worked.
Multiple hourly rates and overtime rates should also be considered in this calculation.
The average hours should be calculated using the 5.6 weeks per year.
For each period of annual leave, a new calculation should be completed to find the 52 week average. You should not refer to the average from a previous calculation.
Hours worked in different pay frequencies such as Monthly or Fortnightly should be broken down into hours worked per week in each period.
We suggest that employers keep a record of weekly hours to allow these calculations to be completed accurately.
There is no basis for using months instead of weeks.
Annual leave calculations prior to April 2020
One method that was previously used was to pay the employee at 12.07% of their weekly/monthly hours at the agreed rate of pay (the rate of pay used for holiday pay has to be their normal rate of pay and if paid different rates then the average rate of pay used). The 12.07% added to their pay is to cover the holiday pay they are due.
This method has just been ruled against in a Supreme court case (this decision technically only applies to term-time work but logically the principle will be applied to all workers who do not have fixed hours) whereby the % calculation can be flawed, especially when employees have patterns of working no hours in a week.
The correct approach is to calculate an average weeks’ pay every time an employee goes on annual leave by looking at the last 52 working weeks in which they had hours, ignoring the weeks where there were no hours, and calculating the average hours. You can go back to a maximum of 52 weeks over the last 2 years.
The 12.07% calculation will be accurate for workers who work every week, but this is not the correct approach and the average of the last 52 weeks should be adopted.
Rolled Up Holiday Pay
Employers who pay their staff for the hours worked as well as their accrued holiday pay in the same pay period should revise their process as it’s not supported by HMRC.
This is referred to as Rolled Up holiday pay.
This is more common when employers would temporarily take on seasonal employees, but HMRC state that employers should encourage their staff to take the annual leave rather than payment, therefore HMRC have ruled that Rolled Up Holiday Pay should no longer be used.
Note from HMRC
The guidance does not provide definitive answers to all individual queries, and in some places takes views on matters which are uncertain. It is not intended to be relied upon in any specific context or as a substitute for seeking advice (legal or otherwise) on a specific circumstance, as each case may be different.
Whether you are a worker or employer, if you are unsure about any aspect of holiday pay entitlement you can contact ACAS.
*HMRC have recently released a statement which confirms that they are consulting on the pro-rata holiday entitlement for part year and irregular hours workers based on the annual hours which they work. They have recognised that the process is complex and challenging for employers to follow and the outcome may not be fair on the employees.
The consultation will close on the evening of the 9th March 2023.
