Start with the statutory basics

Almost every worker in the UK is entitled to statutory paid holiday from day one of their employment. For a full-time employee, that means 5.6 weeks — 28 days if you work five days a week. Bank holidays can be included in that figure, but they don't have to be, and many small businesses choose to include them simply because it's easier to explain in a contract.

Part-time staff get the same 5.6 weeks, but pro rata. Someone working three days a week is entitled to 16.8 days, which you can round up to 17 as long as you don't round down. The statutory maximum is 28 days, so any enhanced holiday scheme above that is a contractual perk rather than a legal requirement.

It's worth checking your contracts now rather than in December when three people ask for the same week off. If your wording is vague about whether bank holidays come out of the 28 days or sit on top, you've created an argument you'll eventually have to settle in the employee's favour.

Calculating holiday pay on average earnings

For staff on a fixed salary, holiday pay is straightforward — you pay what they'd normally earn for the days taken. The difficulty starts with anyone whose pay varies: hourly workers, zero-hours staff, seasonal employees, or anyone earning commission and regular overtime.

For these workers, holiday pay should reflect normal remuneration, not just basic pay. In practice that means calculating average earnings over a 52-week reference period ending on the last day before the holiday starts. Weeks where the worker earned nothing are disregarded, and you count further back to fill the 52 weeks — potentially going back as far as 104 weeks if needed.

• Include regular overtime, commission and bonuses tied to performance.
• Exclude genuine one-off payments and expenses reimbursement.
• Use the same 52-week method for irregular hours and term-time workers.
• Recheck the average each time holiday is taken — it moves.

If that sounds fiddly, it is. A simple spreadsheet that logs weekly pay for each variable-hours worker will save you hours and reduce the risk of an underpayment claim, which can go back two years.

Accrued leave: tracking it properly

Holiday accrues as your staff work, and you need a record you can trust. For regular employees this is usually handled as a monthly or weekly accrual across your holiday year — often January to December, or April to March, depending on what suits your trading cycle.

For staff on irregular hours, accrual is based on hours worked, and the traditional approach uses 12.07% of hours worked. Since April 2024, employers of irregular-hours and part-year workers can also use rolled-up holiday pay, where the holiday element is paid as a percentage on top of each payslip rather than being saved for time off. It's simpler, but it should be shown as a separate line so the worker can see exactly what they've received — and you still need to let them take the time.

Whichever method you use, keep records for at least two years. If an employee disputes their entitlement, a clear audit trail is your best defence. It also helps you spot problems early, like someone who has quietly built up three weeks of untaken leave they'll want to take all at once.

Carry-over, sickness and family leave

The default position is that holiday should be taken in the year it accrues, and unused days are lost. There are important exceptions, though. A worker who couldn't take holiday because of sick leave can carry it over — the four weeks of statutory holiday guaranteed by working time rules, not the extra 1.6 weeks, and for up to 18 months from the end of the year it related to.

Family-related leave follows similar logic. Someone on maternity, adoption, shared parental or long-term sick leave continues to accrue holiday throughout their absence. If they return to work and resign shortly afterwards, they're entitled to be paid for the leave they accrued while away. This is a common tripwire for small employers, so build it into your leaver checklist.

Outside these situations, you can allow a bit of carry-over as a goodwill gesture, but be clear in your policy about how much and by when. Open-ended carry-over creates a liability on your balance sheet that grows quietly year after year.

When someone leaves the business

On termination, a worker must be paid for any holiday they've accrued but not taken. This is a payment in lieu, calculated on the same average earnings basis used during employment, and it should appear on the final payslip. If they've taken more holiday than they accrued, you can usually deduct the excess — but only if your contract or written agreement allows it. Without that clause, deducting from a final wage is risky.

Work out the entitlement to the leaving date, not to the end of the month. For someone leaving mid-month on variable hours, that means recalculating the accrual right up to their last day. Getting this right avoids the awkward follow-up call three weeks later.

Practical steps for keeping it clean

• Write it down. A short holiday policy covering the leave year, bank holiday treatment, notice periods and carry-over rules removes most day-to-day queries.
• Use one system. Whether it's software or a spreadsheet, track bookings and accruals in the same place.
• Review averages monthly. Don't wait until someone books a fortnight off to work out what they're owed.
• Show holiday pay clearly. Separate lines on the payslip build trust and make errors obvious.
• Check contracts annually. Pay rates, reference periods and carry-over rules do change.

None of this has to be complicated, but it does need to be deliberate. A few hours spent getting your process straight now will save you far more when a long-serving member of staff hands in their notice, or when a busy summer exposes a gap you didn't know you had.