Holiday Pay Calculations Compliance

Calculating holiday pay correctly is essential to avoid penalties and maintain a happy workforce. HMRC has clear regulations on how holiday pay should be calculated. Recent changes to employment law have further tightened the requirements.

In this guide, we’ll establish what holiday pay is and, how to calculate it. We’ll also outline the key steps to following the HMRC legislation.

1. Why Holiday Pay Matters

Holiday pay is a legal requirement under the Working Time Regulations 1998. Almost all workers, including part-time, zero-hours, and agency staff, are entitled to a minimum of 5.6 weeks’ paid holiday per year. For full-time staff, that’s usually 28 days, including public holidays.

Failure to pay the correct holiday pay can lead to:

• Stressful HMRC investigations
• Backdated claims from employees you had not taken into account
• Possible tribunal cases and significant financial penalties
• Damage to your reputation and brand

2. What Counts as Holiday Pay

Holiday pay should reflect an employee’s normal earnings — not just their basic wage.  

Included in earnings are:

• Basic pay
• Commission
• Regular overtime
• Bonuses are directly linked to performance
• Shift allowances

HMRC’s guidance: ‘if payments are intrinsically linked to the work the employee normally performs, they should be included in holiday pay calculations’.

3. 52-Week Reference Period

One of the most important changes in recent years is the move to a 52-week reference period for calculating holiday pay for employees with variable hours or pay.

Therefore, you must:

• Take into account the last 52 weeks in which the employee was paid.
• Calculate their average weekly pay across this period.
• Exclude any weeks where no pay was received (but keep going back until you have 52 weeks of paid data — up to a maximum of 104 weeks).

An Example Calculation:

If a casual worker earned £15,600 over the last 52 weeks they worked, their average weekly pay would be:

£15,600 ÷ 52 = £300.

If they take one week of holiday, you must pay them £300.

4. Calculating Holiday Pay for Worker Types

Full-time employees:

Simply multiply their normal weekly wage by the number of holiday weeks they take.

Part-time employees:

Pro-rata their entitlement based on hours worked. For example, if they work 3 days a week, their entitlement is 3/5ths of the full 28 days = 16.8 days.

Zero-hours and variable-hours workers:

Use the 52-week average earnings method, ensuring you exclude unpaid weeks.

5. HMRC Compliance

• Accurate records must be kept for at least 3 years
• You must include all types of earnings in your holiday pay calculations
• You have to use the 52-week reference period
• Ensure holiday pay clauses in contracts are clear and lawful

6. Common Mistakes to Avoid

• Omitting regular overtime from holiday pay
• Paying basic rate only — instead of including all qualifying earnings.
• Using outdated reference periods — the law now requires 52 weeks, not 12.
• Failing to account for irregular work patterns — casual and zero-hours staff are still entitled to correctly calculated paid leave.

7. Getting the Calculation Wrong has Consequences

Incorrect holiday pay calculations can trigger HMRC investigations and claims going back up to two years (or more in some cases).

8. How E&P Services UK Can Help

We help businesses by:

• Calculating holiday pay accurately for all categories of workers
• Staying up to date with the latest HMRC and employment law changes
• Managing payroll records and reporting
• Avoiding mistakes

With the E&P Services UK team, you’ll have peace of mind.

Contact the team for a friendly chat to get started with expert employment and payroll specialists.

[image: Vicko Mozara, unsplash.com]