Navigating Holiday Pay and Entitlement – a TCW Accountancy Overview

Holiday pay may not be the most glamorous part of an accountant’s week, but it is a constant source of queries from clients and payroll teams.  The Chartered Institute of Payroll Professionals (CIPP) has just issued a reminder about holiday pay and annual‑leave rules, summarising what payroll professionals and their advisers should know for the current holiday year .  The guidance emphasises that employers must start by identifying which category each worker belongs to, because the way holiday pay and entitlement are calculated depends on how (and when) they work .

Three categories of workers

According to CIPP, employees fit into three categories for holiday pay purposes .  Each category has distinct rules on how much holiday a worker is entitled to and how their holiday pay should be calculated:

1. Workers with set hours.  These are employees whose contracts specify a fixed number of hours per week or month.  They are entitled to at least 5.6 weeks of paid leave per year .  Their holiday entitlement does not increase when they work overtime .  When they take leave, holiday pay is calculated based on the worker’s average pay over a 52‑week reference period (looking back over 104 weeks to exclude any weeks in which no pay was received) .

2. Irregular‑hours workers (IR).  These workers have no set hours; they might work variable schedules or be on zero‑hours contracts.  For holiday years before 1 April 2024 they were entitled to the standard 5.6 weeks of leave .  For holiday years starting on or after 1 April 2024, their leave accrues per hour worked .  Employers calculate entitlement either by adding 12.07 % of the total hours worked each pay period to a holiday‑accrual ‘bank’ or by paying 12.07 % of the worker’s gross pay as a rolled‑up holiday payment .  Rolled‑up holiday pay must be shown separately on the payslip, and workers still need to take time off.

3. Part‑year workers (PY).  These employees only work during certain periods of the year, such as term‑time or seasonal staff.  Their entitlement rules mirror those for irregular‑hours workers: they had a 5.6‑week statutory entitlement up to 31 March 2024 and accrue leave per hour worked from 1 April 2024 .  Employers calculate 12.07 % of the hours worked or gross pay each pay period to build a bank of holiday hours or pay rolled‑up holiday pay .

Why 12.07 %?

The percentage comes from the statutory entitlement of 5.6 weeks of leave.  Holiday entitlement is calculated as a fraction of the working year: 5.6 weeks out of 52 weeks leaves 46.4 working weeks, so 5.6 ÷ 46.4 equals 12.07 % .  If an employer gives more than the statutory minimum, the percentage must be adjusted accordingly.

Key points for set‑hours employees

Workers with defined hours must receive at least 5.6 weeks of paid leave.  Many employers provide more generous allowances, but the statutory minimum cannot be reduced .  When staff work overtime their holiday entitlement does not increase.  For example, the CIPP notes that Amir, contracted to work 30 hours per week, often works 5 hours overtime; his annual entitlement remains 5.6 weeks, equating to 168 hours (30 × 5.6) .  However, overtime earnings must be included when calculating holiday pay, which is based on average pay over a 52‑week reference period .  Employers should collect at least 104 weeks of pay history so that weeks with no pay can be excluded.

Irregular‑hours and part‑year workers: the 2024 reforms

Changes introduced in April 2024 recognise that employees without fixed hours should accrue holiday on a pro rata basis.  Up to 31 March 2024, irregular‑hours and part‑year workers were entitled to the same 5.6‑week statutory leave as full‑time staff .  From 1 April 2024 the law allows employers to calculate entitlement per hour worked .  CIPP’s guidance sets out two methods for doing this:

1. Accrued holiday hours – multiply the hours worked each pay period by 12.07 % to determine how much leave has been earned .  These hours are banked and taken as leave when the worker books time off; holiday pay is then based on average pay over the previous 52 weeks.

2. Rolled‑up holiday pay – multiply the worker’s gross pay for the period by 12.07 % and pay this amount in addition to regular wages .  The rolled‑up amount must be clearly shown on the payslip and workers must still take leave (often by not accepting shifts).  This method provides cash flow for staff but means they will not receive pay when they take their holiday.  Employers should discuss the arrangement with workers to ensure it is understood and embedded contractually.

Regional variations and caveats

CIPP’s article applies to England, Scotland and Wales; employment law is devolved in Northern Ireland, and different rules may apply .  The guidance also notes that the law continues to evolve and that payroll professionals should always check the publication date and seek updated information .  For example, the reforms to rolled‑up holiday pay were only introduced in 2024 and may be subject to review by future governments.

Practical implications for accountants

For TCW Accountancy clients, the key challenge is ensuring that payroll processes accurately reflect employees’ working patterns.  In practice this means:

• Identifying worker status – confirm whether each employee has set hours, irregular hours or works part of the year.  Misclassifying workers can lead to under‑ or over‑payments.

• Adapting systems – payroll software must be able to calculate holiday accrual at 12.07 % of hours worked or gross pay.  Systems also need to maintain a 52‑week pay reference period so that overtime and variable pay are included in holiday pay calculations.

• Communication – rolled‑up holiday pay can be attractive to workers who prefer their holiday pay in real time, but it removes income during leave.  Accountants should ensure clients communicate this clearly, update employment contracts where necessary and encourage employees to take their entitled holiday.

• Record keeping – keep detailed records of hours worked, gross pay, holiday accrual and leave taken.  Accurate records will help defend against potential claims and audits.

Conclusion

Holiday pay remains a complex area for employers, especially when workers do not have fixed hours.  The 2024 reforms simplify entitlement by allowing holiday to accrue per hour worked, but they also introduce choices – such as rolled‑up pay versus banked hours – that employers must administer carefully.  By understanding the categories of workers and applying the appropriate calculation method, accountants can ensure their clients remain compliant and that employees receive the paid leave they are entitled to.  For further details and to access helpful flowcharts, visit the CIPP’s full guidance .

Disclaimer: This article summarises guidance as at 15 September 2025 from the Chartered Institute of Payroll Professionals.  Employment law changes regularly; always verify current rules and seek professional advice before making payroll decisions .