Ask the Expert: Holiday Pay – What Employers Really Need to Know

Holiday pay is one of those areas that seems straightforward… until you actually try to calculate it.

We’ve been getting a lot of questions on this recently, so I sat down to talk through what employers really need to know—and where things are changing.

So, Nita, the big question:

Why does holiday pay cause so many problems?

Because on the face of it, it sounds simple. Someone takes time off, you pay them.

But in reality, the law doesn’t say “pay basic salary.” It says you should pay what the employee would normally earn if they were working. And that’s where it becomes more nuanced.

If someone regularly earns overtime, commission or allowances, you can’t just ignore that when they go on holiday. That’s where a lot of businesses unintentionally fall short.

So what does ‘normal pay’ actually mean?

It’s exactly that—what’s normal for that individual.

If someone’s pay is consistent every month with no extras, then yes, their salary is their holiday pay. Nice and straightforward.

But if their pay fluctuates, or they regularly earn more than their basic salary, then holiday pay needs to reflect that pattern. It’s about mirroring reality, not simplifying it.

How do you approach this for hourly-paid staff?

This is where the 52-week reference period comes in.

Rather than trying to guess what someone might have earned, you look backwards. You take their last 52 weeks where they were actually paid and calculate the average.

So, for example, if an employee earned £26,000 over those 52 weeks, their average weekly pay would be £500. If they take a week’s holiday, that’s what they should receive.

It naturally captures overtime, busy periods, quieter weeks—it’s a much fairer reflection.

What if they haven’t worked a full 52 weeks?

Then you just work with what you’ve got.

If they’ve only been with you for 20 weeks, you average over those 20 weeks. If there are gaps where they weren’t paid, you skip those weeks and go further back, up to a maximum of 104 weeks.

It’s all about building a realistic picture of earnings.

And salaried employees—are they easier?

They can be, but not always.

If someone is on a fixed salary and that’s all they earn, then the calculation is simple. A £30,000 salary works out at roughly £576.92 per week, so that’s what a week of holiday costs.

But where it gets interesting is when salaried employees also regularly earn overtime or additional payments.

This is where people tend to get caught out, isn’t it?

Exactly.

There’s still a common misconception that if someone is salaried, you just pay their salary when they’re on holiday. But that’s not always correct.

If that employee consistently earns, say, an extra £100 a week in overtime, then their “normal pay” isn’t £576—it’s closer to £676.

And if you ignore that, you’re underpaying holiday.

How do you decide what counts as ‘regular’ overtime?

It’s less about a strict rule and more about a pattern.

If overtime shows up consistently over time: week in, week out, or regularly enough that it forms part of their expected earnings, it’s very likely to count.

If it’s genuinely occasional or one-off, that’s different. But most businesses know, instinctively, whether overtime is part of the job or not.

We still hear people talking about the 12-week rule—is that still relevant?

No, and this is one of the biggest outdated practices we still see.

The reference period moved from 12 weeks to 52 weeks some time ago. If businesses are still using 12 weeks, they could be significantly under or overpaying.

What about rolled-up holiday pay? Has that come back into play?

Yes, but only in certain situations.

Since 2024, rolled-up holiday pay is now permitted for irregular hours and part-year workers, which has been helpful for some employers.

But it doesn’t replace the need to calculate holiday correctly, it just changes how it’s paid. And importantly, employees still need to take their leave.

Are there any changes coming with the Employment Rights Act 2025?

This is the key question everyone is asking.  The short answer is: the way you calculate holiday pay isn’t fundamentally changing.

The core principles remain:

• 52-week reference period
• “Normal pay” including overtime and commission
• The distinction between the 4 weeks and the additional 1.6 weeks

That structure is staying in place.

However, what is changing is the level of scrutiny around it.

From April 2026, employers will be required to keep detailed records of holiday and holiday pay for six years, including how those calculations were reached.

So while the calculation itself isn’t being rewritten, the expectation around evidence and compliance absolutely is.

So the risk for employers is increasing?

Yes—and that’s the real takeaway.

Holiday pay claims have already been on the rise, and when you combine that with stronger enforcement and record-keeping requirements, it becomes much easier for issues to be identified and challenged.

This isn’t an area where you can afford to be approximate anymore.

Turning to some other aspects of calculating holiday pay, what happens if someone is off sick—can they still take holiday?”

Yes, they can and sometimes they may want to.  That said, it is important to understand, this is the employee’s choice, not the employer’s.

If an employee is off sick, they can request to take holiday instead of sick leave. This often comes up because holiday pay is usually higher than sick pay, particularly where someone is only receiving Statutory Sick Pay.

If they make that request, you can agree to it and pay them at their normal holiday pay rate.

However, employers should be cautious not to impose this. While there are rules around giving notice to require holiday in other situations, it is not best practice—and carries risk—to force an employee who is genuinely unwell to take holiday instead of sick leave.

If an employee is off sick, they have the option to take holiday instead of sick leave. The reason this often comes up is because holiday pay is usually higher than sick pay, especially if they’re only receiving Statutory Sick Pay.

So, if they request it, you can allow them to use annual leave during a period of sickness absence, and they should be paid at their normal holiday pay rate.

What if they don’t take holiday while they’re off sick?

Then their holiday entitlement continues to accrue as normal.

If they’re off for a long period, they may not be able to take all of their holiday within the leave year. In those cases, the law allows them to carry forward up to 4 weeks of unused leave into the next leave year.

This is something employers need to keep an eye on, particularly with long-term absence, as it can build up quite quickly.

Can an employee be forced to take holiday while off sick?

As I have already explained, this is where you need to tread carefully.

In theory, employers can require employees to take holiday at certain times by giving the correct notice. However, in practice, forcing someone who is genuinely unwell to take holiday instead of sick leave can be risky and is often challenged.

Most employers take a more cautious, supportive approach and allow the employee to choose.

Just turning to holiday and holiday pay during other periods of leave.

How does holiday work during maternity leave?

This is a really important one, and often misunderstood.

Employees on maternity leave continue to accrue their full holiday entitlement as if they were at work. That includes both statutory leave and any contractual enhancement.

Because they’re not usually taking holiday during maternity leave itself, this entitlement is often taken either before they go off or when they return.

Can they take holiday during maternity leave?

Not at the same time, no.

Maternity leave and annual leave can’t run concurrently. However, what you often see in practice is employees choosing to tag holiday onto the beginning or end of their maternity leave, which can be a really helpful way of extending time on full pay.

And how is holiday pay calculated when they return from maternity leave?

This is where employers sometimes get caught out.

If the employee has variable pay, you should still be looking at what their normal pay would be, not just what they received during maternity leave.

So, you don’t base holiday pay on statutory maternity pay—you base it on their usual earnings pattern. That might mean looking back to a relevant reference period before their leave.

Does the same apply to paternity leave and other statutory leave?

Yes, the principle is the same.

During paternity leave, adoption leave, shared parental leave and other forms of statutory leave, employees continue to accrue holiday as normal.

And again, holiday pay should reflect their normal earnings, not the reduced statutory payment they may have received during that period.

This is all very helpful and I can see how easily employers can get it wrong – even in the most innocent circumstances.

If you had one piece of advice for employers, what would it be?

Don’t overcomplicate it—but don’t oversimplify it either.

If you step back and ask, “What would this person have earned if they were at work?”.  That usually gets you very close to the right answer.

And then make sure you can evidence how you got there.

Because increasingly, it’s not just about getting it right, it’s about being able to prove that you did.

What is your Final thought Nita?

Holiday pay isn’t just a payroll task, it’s a compliance area that deserves real attention.

If your current approach is to default to basic pay, or if you’re unsure how overtime and variable earnings are being treated, now is the time to review it. The principles themselves haven’t changed, but expectations around accuracy and record-keeping are tightening.

In simple terms, your calculation should reflect what the employee would normally earn, and you should be able to clearly explain how you’ve arrived at that figure.

Get that right, and you not only reduce your risk, you also build trust with your workforce, which is just as important.