Getting holiday pay wrong is one of the most common payroll errors in UK businesses — and it can lead to underpayment claims, tribunal cases, and back-pay liabilities running into years. The rules have changed significantly in recent years, particularly around variable-hours workers and rolled-up holiday pay. This guide explains exactly how to calculate holiday pay correctly in 2026.
The fundamental principle of holiday pay in the UK is straightforward: when a worker takes a week of annual leave, they should receive a week's normal pay. The purpose is to ensure workers are not financially penalised for taking time off, which would discourage them from using their entitlement.
The complexity arises when you need to define what "normal pay" means for workers whose earnings vary from week to week — those on irregular hours, overtime, commission, or shift patterns.
For employees who work the same number of hours every week on a fixed salary, the calculation is simple. Their holiday pay is their normal weekly pay — exactly what they would have earned if they had been at work.
For example, an employee earning £30,000 per year on a standard 37.5-hour week receives £576.92 per week (before deductions). When they take a week's holiday, they receive £576.92. No additional calculation is needed.
Part-time workers on fixed hours follow the same principle. A worker on 20 hours per week at £12 per hour receives £240 per week of holiday.
This is where most employers make mistakes. When a worker's pay varies — because of overtime, commission, bonuses, or irregular shift patterns — you must use a reference period to calculate their average weekly earnings.
Since April 2020, the reference period for calculating average weekly pay is 52 weeks (previously 12 weeks). You look back at the last 52 weeks in which the worker was paid and calculate their average weekly earnings across that period.
If there are weeks in which the worker received no pay (for example, because they were on unpaid leave or there was no work available), you skip those weeks and go back further until you have 52 paid weeks. The look-back is capped at 104 weeks.
This change was significant because the old 12-week period could produce misleading results — for example, a worker with a seasonal pattern might have their holiday pay calculated during their quietest period.
Following a series of landmark court cases, the definition of what must be included in holiday pay has expanded considerably. As of 2026, holiday pay must include:
The key test from Harpur Trust v Brazel (2022) confirmed that holiday pay for part-year workers (such as term-time staff) must not be pro-rated down. A part-year worker is entitled to 5.6 weeks of holiday pay based on their average weekly earnings when they actually work, not spread across the full year. This ruling significantly increased holiday pay costs for employers with part-year staff.
Rolled-up holiday pay is the practice of including an uplift in a worker's hourly or weekly rate to cover holiday pay, instead of paying them separately when they take time off. Historically this was considered unlawful by the courts, but the law changed in January 2024.
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 made rolled-up holiday pay expressly legal for two categories of worker:
When using rolled-up holiday pay, the employer must add a 12.07% uplift to the worker's pay (representing 5.6 weeks divided by 46.4 working weeks). This must be shown as a separate, identifiable line item on the payslip. The worker then takes their holiday unpaid, having already received the holiday pay element in each pay period.
Rolled-up holiday pay is not permitted for workers on regular, fixed hours. For those workers, the standard method of paying holiday when it is taken still applies.
Holiday pay errors are widespread. Here are the mistakes we see most often:
Part-time workers are entitled to the same pro-rata holiday entitlement as full-time workers. For statutory purposes, this means 5.6 weeks of paid holiday per year, regardless of how many days or hours they work per week.
For example, a worker on 3 days per week gets 3 × 5.6 = 16.8 days of statutory holiday. Their holiday pay for each day is their normal day's pay. If they earn £100 per day, each day of holiday is paid at £100.
The key principle is that part-time workers must not be treated less favourably than comparable full-time workers, in line with the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000.
Manual holiday pay calculations are error-prone and time-consuming, especially for variable-hours workers. Leavely takes the guesswork out of it:
Leavely calculates entitlements, tracks balances, and applies your policies automatically — so holiday pay is always right.