Holiday Pay: Are You Calculating It Correctly?

A tribunal claim for underpaid holiday pay can cover up to two years of back payments. It does not require a disgruntled employee or a deliberate error. It simply requires a miscalculation that has been repeated quietly over time, often because the employer assumed that holiday pay meant basic pay.

That assumption is one of the most common and costly mistakes small businesses make with their staff. The holiday pay rules for UK employers are more nuanced than most people realise, and the gap between what you think you are paying and what the law actually requires can add up to a significant liability.

This guide covers what you genuinely need to know: the rules, the mistakes that trip businesses up, a worked example so you can see how the numbers actually work, and what a tribunal will look for if a claim ever lands on your desk.

The Basics Every Employer Needs to Know

Almost all workers in the UK are legally entitled to 5.6 weeks of paid statutory holiday per year. For a full time employee working five days a week, that is 28 days, including bank holidays.

That much most employers know. Where it gets complicated is in how you calculate the pay itself, because not all holiday pay is calculated the same way.

There are two separate rates within that 5.6 week entitlement:

• Four weeks at normal pay (known as Regulation 13 leave, rooted in EU derived law)
• The remaining 1.6 weeks at basic pay (Regulation 13A leave, the additional UK entitlement)

That distinction is essential. Many employers pay all 5.6 weeks at basic pay. In many cases, that is a breach of the law.

What Counts as Normal Pay?

Normal pay is not just basic salary. The holiday pay rules for UK employers are now written explicitly into legislation, and they are clear: normal pay for those four weeks of Regulation 13 leave must include:

• Regular overtime, if it has been paid consistently in the 52 weeks before the calculation date
• Commission payments that are intrinsically linked to the tasks your employee is contractually required to carry out
• Payments related to length of service, seniority, or professional qualifications

What is generally excluded: genuinely discretionary bonuses, expense reimbursements, and overtime that is truly occasional and unpredictable.

The practical implication is significant. If you have employees who regularly work overtime or earn commission, and you have been paying them basic pay during their holidays, you are very likely underpaying them. That is an unlawful deduction of wages, regardless of whether it was intentional.

The 52 Week Reference Period

For workers with fixed hours and fixed pay, holiday pay is simply their normal weekly wage. For workers whose pay varies, you calculate it using the average pay received in the 52 weeks before the holiday. Any weeks where no pay was received are excluded and replaced with earlier weeks, so you are always averaging across 52 actual paid weeks.

This approach is confirmed in the Government's guidance on holiday pay and entitlement reforms, which is worth bookmarking if you manage staff with any form of variable pay.

A Worked Example: Where the Numbers Go Wrong

The truth about holiday pay errors is that they are often invisible until someone runs the numbers. Here is a straightforward example to show you what is at stake.

Sarah works full time as a sales coordinator. Her basic salary is £26,000 per year (£500 per week). She also earns a regular average of £80 per week in overtime and £60 per week in commission that is directly tied to her contracted sales targets. Her normal weekly pay for holiday purposes is therefore £640, not £500.

If Sarah takes three weeks of Regulation 13 leave in a year, the underpayment is £420 (3 x £140). Over two years, that is £840 per employee. Multiply that across a team where this pattern is common, and the liability becomes a serious number.

This is not a hypothetical. It is exactly the kind of claim that employment tribunals see regularly, and it is exactly what a properly written employment contract and holiday policy should prevent.

Irregular Hours Workers and Part Year Workers: The Essential 2024 Changes

If you employ anyone on a zero hours contract, a casual arrangement, or any role where hours vary substantially from one pay period to the next, you need to understand the changes that came into effect for leave years beginning on or after 1 April 2024.

The 12.07% Accrual Method

For irregular hours workers and part year workers, holiday entitlement now accrues at 12.07% of actual hours worked in each pay period. That figure comes from the fact that 5.6 weeks of leave represents 12.07% of the remaining 46.4 working weeks in the year.

In practice: if a casual worker works 40 hours in a month, they accrue approximately 4.8 hours of holiday entitlement for that month. Clean, proportionate, and accurate.

This method applies only to qualifying workers and only for leave years starting on or after 1 April 2024. It does not apply retrospectively to earlier leave years.

Rolled Up Holiday Pay

Employers can now lawfully use rolled up holiday pay for irregular hours and part year workers. This means adding 12.07% to each payslip as a holiday pay supplement, rather than paying it when leave is taken.

If you use this method, holiday pay must be itemised separately on the payslip. You cannot include it within the hourly rate without clearly showing it. And whichever approach you take, it needs to be reflected consistently in your employment contracts and holiday policy.

The Mistakes That Prove Costly

The holiday pay rules for UK employers are clear enough in principle. In practice, a handful of errors come up time and again in tribunal cases.

Paying Basic Pay Only Across All Leave

Excluding regular overtime and commission from holiday pay is the most common and most expensive error. If your employees regularly earn above their basic rate, their four weeks of Regulation 13 leave must reflect that. Paying basic pay for all 5.6 weeks is almost certainly wrong for anyone with variable earnings.

Misapplying the 12.07% Method

The 12.07% accrual method is only for irregular hours and part year workers with leave years starting on or after 1 April 2024. Applying it to employees on fixed contracts understates their entitlement. Applying it retrospectively to earlier leave years is also an error. Tribunals do not accept administrative convenience as a defence.

Getting Worker Classification Wrong

Not every worker on a flexible rota qualifies as an irregular hours worker under the legal definition. The key question is whether their hours are wholly or mostly variable in each pay period. A rotating shift pattern with fixed hours for each shift, for example, does not qualify. A wrong classification exposes you to claims covering multiple leave years.

Ignoring Carry Over Rules

If an employee cannot take their statutory leave because of sickness or family related leave, specific carry over rules apply. Regular hours workers can carry over up to 20 days in those circumstances. Irregular hours and part year workers can carry over their full entitlement. Ignoring this creates additional liability on top of any underpayment issue.

No Written Policy in Place

Without a clear, up to date holiday policy, you are managing everything on assumptions and verbal agreements. That is a weak position in any dispute. A well drafted policy sets out how entitlement is calculated, when and how holiday pay is made, and how requests are handled, so there is no room for confusion on either side.

What a Tribunal Will Look For

Holiday pay claims are brought as unlawful deduction of wages claims under the Employment Rights Act 1996. They are straightforward for an employee to bring, the fees are low, and the backdating window is up to two years.

If a claim arrives, a tribunal will want to see:

• How you have been calculating holiday pay and whether it matches the legal requirements
• Whether your employment contracts and policies accurately describe your approach
• Evidence that regular overtime and commission were factored into normal pay calculations
• That you correctly identified irregular hours workers and applied the right method for the right leave year
• That rolled up holiday pay, if used, was clearly itemised on payslips

Accurate, consistent documentation is your most effective protection. Contracts, payslips, and policies that are legally sound and coherent with each other significantly reduce your risk. If any of those documents are out of date or vague on the detail, it is worth addressing that before a problem arises. Take a look at how we approach employment contracts and employee handbooks if you want to understand what good looks like.

Holiday Pay Compliance: A Practical Checklist

Use this proven checklist to sense check your current approach before a problem arises. If you find yourself unsure on any point, that is a signal worth acting on.

Worth Reading Next

Holiday pay does not exist in isolation. Two of our most useful posts on related people management issues:

If you are managing someone whose absence is affecting their holiday accrual or whose performance has become a formal issue, our post on the difference between capability and disciplinary procedures explains clearly which process applies and why getting that wrong is a separate risk entirely.

And if you have a member of staff returning from a period of long term sickness, you will want to understand how holiday entitlement accrues during sick leave before you start the return to work conversation. Our post on phased return to work covers this in detail. For ongoing support with cases like this, find out how we help businesses with long term sickness management.

Not Sure Where You Stand?

Holiday pay is one of those areas where a small error, repeated quietly over time across several employees, can grow into a significant liability. The rules changed meaningfully in 2024, and many businesses have not yet reviewed their practices to confirm they are keeping up.

If you are not confident that your approach is correct, now is the right time to check. Getting it right before a claim arrives is always the better position to be in.

You can book a free HR consultation call and we will talk through how you are currently handling holiday pay and whether anything needs attention. Or if you would prefer to get in touch first, head to our contact page and we will come back to you quickly.

We work with small and medium businesses across Wiltshire and beyond, helping owners get the HR foundations right so that people issues stay manageable and legal exposure stays low. Holiday pay is one piece of that picture, but it is an important one to get right.