Holiday Pay Methods: A Guide for UK Employers (2024 Onwards)
As an employer in the UK, managing holiday pay for your employees is crucial for ensuring compliance with legal requirements and maintaining fair labour practices. This simplified guide will help you understand the available options for handling holiday pay under the new regulations, effective from 1 January 2024.
Key Changes and Requirements from 2024
From January 1, 2024, new regulations define the components that must be included when calculating the 'normal' rate of holiday pay. This ensures that a worker's regular earnings are properly reflected during their leave. These components include:
- Payments intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out, such as commission payments.
- Payments relating to professional or personal status, such as length of service, seniority, or professional qualifications.
- Regular payments such as overtime, calculated based on the average paid over the 52 weeks preceding the calculation date.
For official and more detailed guidance, always refer to the GOV.UK website on holiday entitlement and pay.
Options for Holiday Pay Calculation
1. Fixed Monthly Salary Workers
For workers with regular hours and fixed pay, the calculation of holiday pay is straightforward: they receive the same holiday pay as if they were working. For instance, a worker on a fixed monthly salary who takes a week's holiday will receive the same pay at the end of the month as usual, as their salary already accounts for their paid leave entitlement.
2. Part-Year and Irregular Hours Workers
These workers are entitled to up to 5.6 weeks of paid statutory holiday per year. Employers can choose between two primary methods for calculating and paying their holiday entitlement:
- Rolled-Up Holiday Pay
- 52-Week Reference Period
Rolled-Up Holiday Pay
Rolled-up holiday pay allows employers to include an additional amount in each payslip to cover holiday pay. This method is calculated as 12.07% of the worker's total pay, reflecting the statutory annual leave proportion (5.6 weeks out of 46.4 working weeks in a year). This method is specifically applicable only for part-year and irregular hours workers from 1 April 2024 onwards.
In effect, the employee is paid any holiday entitlement they accrue as they accrue it, rather than when they take time off.
Example Calculation:
If Hana works irregular hours and is paid weekly at £10.42 per hour, and she worked 35 hours in one particular week:
- Total weekly pay: 35 hours x £10.42 = £364.70
- Rolled-up holiday pay (12.07% of £364.70): £44.06
- Hana's total gross pay for that week would be £364.70 + £44.06 = £408.76, with £44.06 clearly marked as rolled-up holiday pay.
Employers opting for this method should:
- Ensure the additional holiday pay amount is clearly marked on payslips as a separate item.
- Inform employees if their contract will be varied to include rolled-up holiday pay.
Important Consideration:
Employees receiving rolled-up holiday pay get their holiday pay with each payday. This means they need to budget and save that portion of their earnings to cover their time off, as they will not receive additional pay during their actual leave periods.
52-Week Reference Period
This method involves calculating holiday pay based on the worker's average earnings over the previous 52 paid weeks. It ensures that holiday pay reflects the worker’s actual earnings, accounting for fluctuations in working hours and pay over time. With this method, the employee accrues holiday entitlement into a 'holiday fund', and the employer pays a normal wage out of this fund to the employee when they take time off.
Key Points for the 52-Week Reference Period:
- Employers need to look back over the last 52 paid weeks when calculating the average (excluding weeks where no pay was received).
- For workers employed for less than 52 weeks, the reference period will be the number of weeks worked.
- If the worker has less than 52 weeks of paid work within the last 104 weeks, use all available paid weeks within that 104-week period to calculate the average.
Important Consideration:
With the 52-week reference period method, employees do not need to save money specifically for their holidays, as they will be paid their holiday pay at the time they take their leave. However, this means the employer will need to account for and pay out the holiday pay during the employee's time off, which requires accurate tracking of accrued entitlement.
Choosing the Right Method
Employers can choose the method that best suits their workforce’s needs and their administrative capabilities. For part-year and irregular hours workers, rolled-up holiday pay offers simplicity and immediate clarity on pay for the employee. However, the 52-week reference period can provide a more precise reflection of a worker’s average earnings over time, potentially leading to fairer pay for those with highly variable hours.
The biggest difference between the two methods is when the holiday entitlement is paid to the employee:
- Rolled-up holiday pay pays the employee their entitlement as they earn it with each payslip.
- The 52-week reference period method has the entitlement earned 'banked' and paid out at the time the employee takes their leave.
**Note:** This information is a general guide and regulations can be complex. The rules regarding holiday pay changed significantly from 1 January 2024, with specific provisions for rolled-up holiday pay applying from 1 April 2024. Always seek professional advice for specific employment situations and consult the latest official HMRC and ACAS guidance.