Holiday Pay Rules Explained: How to Avoid Expensive Mistakes

For businesses, holiday pay isn’t just a nice-to-have perk, it’s a legal obligation. Failing to handle it correctly can result in costly disputes, fines, or tribunal claims. At Home of HR, we help small businesses navigate these rules confidently, ensuring employees are treated fairly while your business stays protected.

1. Understanding Statutory Holiday Entitlement

All employees in the UK are entitled to at least 5.6 weeks of paid annual leave per year. For someone working a five-day week, that’s 28 days, including public holidays.

Key points:

  • Part-time workers are entitled to pro-rata holiday.

  • Agencies, casual staff, and workers with irregular hours have specific calculations.

2. Calculating Holiday Pay

Holiday pay must reflect what the employee would normally earn. Mistakes often happen with:

  • Overtime - certain types of overtime must be included.

  • Commission and bonuses - regular and guaranteed payments may count.

  • Irregular hours - averages over a 52-week period may be needed.

Tip: Keep records of hours, overtime, and bonus payments to avoid disputes.

3. Carrying Over Holiday

  • Statutory leave is generally use-it-or-lose-it within the holiday year.

  • Exceptions exist for long-term illness or maternity/paternity leave, where unused holiday can be carried over.

Failing to account for carried-over leave can result in claims for unpaid holiday pay.

4. Holiday Pay When Leaving

When an employee leaves, they must be paid for any unused holiday. This includes:

  • Partially used annual leave

  • Holiday accrued during notice periods

Mistakes here are a common cause of employment tribunal claims.

5. Avoiding Common Mistakes

Common Mistakes How to Avoid It
Using “flat-rate” holiday pay Calculate based on actual earnings including overtime/bonuses
Ignoring part-time or irregular hours Pro-rata entitlement and averaging is required
Failing to pay on termination Track leave accrual and include in final pay
Not keeping clear records Maintain holiday logs and payroll documentation

6. How Home of HR Can Help

Holiday pay rules may seem straightforward, but the details matter. Home of HR helps small businesses:

  • Create clear holiday policies

  • Calculate holiday pay accurately

  • Stay compliant and reduce the risk of disputes

With the right support, you can protect your business, satisfy your employees, and avoid expensive mistakes.

Your people are your biggest asset, and compliance with holiday pay rules is a key part of keeping them happy and your business secure.



Alice Hosker