Holiday Pay Methods

Key Changes and Requirements

From January 1, 2024, the regulations define the components that must be included when calculating the 'normal' rate of holiday pay. This includes:

• 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 paid in the 52 weeks preceding the calculation date.

Options for Holiday Pay Calculation

Rolled-Up Holiday Pay

Rolled-up holiday pay allows employers to include an additional amount in each payslip to cover holiday pay. This 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). This method is applicable only for part-year and irregular hours workers from 1 April 2024 onwards. In effect, the employee is paid any holiday entitlement they have accrues as the accrue it.

Example Calculation:

If Hana works irregular hours and is paid weekly at £10.42 per hour, and she worked 35 hours in one 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 pay for that week would include £44.06 as rolled-up holiday pay.

Employers opting for this method should:

• Ensure the additional holiday pay is clearly marked on payslips.

• 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 save that portion of their earnings to cover their time off, as they will not receive additional pay during their leave.

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 earnings, accounting for fluctuations in working hours and pay. The employee accrues holiday entitlement into a holiday fund, and the employer pays a normal wage out this fund, to the employee, when they take time off.

Key Points:

• Employers need to look back over the last 52 paid weeks (excluding weeks without pay).

• For workers employed 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 period.

Important Consideration: 

With the 52-week reference period method, employees do not need to save money for their holidays, as they will be paid their holiday pay when they take their time off. However, this means the employer will need to pay out the holiday pay at the time of the employee's leave.

Choosing the Right Method

Employers can choose the method that best suits their workforce’s needs. For part-year and irregular hours workers, rolled-up holiday pay offers simplicity and immediate clarity on pay. However, the 52-week reference period can provide a more precise reflection of a worker’s average earnings.

The biggest difference between the two methods is when the holiday entitlement is paid to the employee.
Rolled-up pays the employee their entitlement as they earn it, 52-week has the entitlement earned 'banked' and paid out at the time of taking the leave.