How holiday pay is calculated at termination
UK workers are entitled to 5.6 weeks (28 days) of paid annual leave per year — the statutory minimum. Many contracts give more (30+ days is common for senior or long-service employees).
At termination, you're entitled to be paid for any leave accrued during the current leave year that you haven't yet taken.
The basic formula:
Accrued days = (days worked in the leave year ÷ 365) × annual entitlement
Unused days = Accrued days − days already taken
Holiday pay = Unused days × normal daily rate
Critical: leave year matters. Most UK employers run the leave year either: - April 6 to April 5 (matches the tax year) - January 1 to December 31 (calendar year) - A specific start date based on your employment start
Your contract specifies which applies.
Worked example 1 — terminated mid-year, simple case
- Annual leave entitlement: 28 days
- Leave year: April 6 to April 5
- Termination date: October 6 (6 months into leave year)
- Days taken so far: 10
- Salary: £35,000 (£35,000 / 260 working days = £134.62/day)
Accrued by October 6: - (183 days / 365) × 28 = 14.04 → round to 14 days accrued
Unused at termination: - 14 - 10 = 4 days unused
Holiday pay: - 4 × £134.62 = £538.48 gross
Tax: at 20% basic rate + 8% NI = £150.77 deducted Net holiday pay: ~£387.71
Worked example 2 — bonus-month termination, higher earner
- Annual leave entitlement: 30 days (contractual)
- Leave year: April 6 to April 5
- Termination date: February 28 (11 months in)
- Days taken: 22
- Salary: £75,000
Accrued by February 28: - (329 days / 365) × 30 = 27.04 → 27 days accrued
Unused: - 27 - 22 = 5 days unused
Holiday pay calculation: - £75,000 / 260 working days = £288.46/day - 5 × £288.46 = £1,442.31 gross
Tax at higher rate (40%) + 2% NI = £605.77 deducted Net holiday pay: ~£836.54
What counts as "normal day rate"
The Working Time Regulations 1998 require holiday pay to reflect "a worker's normal remuneration" — not just basic salary. Holiday pay should include:
- Basic salary
- Regular contractual bonus payments
- Shift premiums for your normal working pattern
- Regular contractual overtime
- Commission (typically averaged over 12 weeks for variable earners)
- London weighting / regional allowances
What's typically excluded: - One-off discretionary bonuses - Tips (handled separately) - Reimbursed expenses - Benefits in kind
A common employer error: paying holiday at basic-only rate when your normal pay includes meaningful regular commission, overtime, or bonus. If your total compensation is substantially higher than basic, the holiday pay calculation should reflect that.
For irregular-hours workers, the calculation uses an average of the previous 52 weeks' pay (or 12 weeks if you worked fewer).
Tax treatment — outside the £30,000 threshold
Holiday pay is treated as ordinary earnings:
- Subject to Income Tax at your marginal rate
- Subject to employee NI at 8% (between primary threshold and upper limit) or 2% (above upper limit)
- Does NOT sit inside the £30,000 redundancy tax-free threshold
This is a critical distinction. A poorly-organised final pay run might bundle holiday + redundancy as "lump sum on termination" — that's wrong. The correct breakdown:
- Statutory + enhanced redundancy → £30,000 tax-free, then marginal-rate Income Tax with no NI
- Notice pay / PILON → fully Income Tax + NI
- Holiday pay → fully Income Tax + NI
- Bonus pro-rata → fully Income Tax + NI
Each should appear as a separate line on your termination payslip.
Statutory minimum vs contractual entitlement
The Working Time Regulations 1998 set the statutory floor at 5.6 weeks (28 days). Your contract or employee handbook may give more.
| Annual leave entitlement | Typical setup |
|---|---|
| 28 days (incl. bank holidays) | Many UK employers, default statutory |
| 28 days + 8 bank holidays = 36 | Common in larger employers |
| 25 days + bank holidays | Common in some sectors |
| 30+ days | Senior or long-service employees |
The contract sets your specific entitlement. Statutory accrual is calculated proportionately if you've worked less than a year.
Bank holidays — included or extra?
UK has 8 bank holidays per year (England). Whether they're paid leave on top of your 28 days or counted within the 28 depends on your contract:
Within the 28: 28 days total leave, including any bank holidays you take off On top of the 28: 28 working days + bank holidays separately
Read your contract. If unclear, the default under WTR is that bank holidays are within the 5.6 weeks unless the contract specifies otherwise.
What happens if you've taken too much leave
If your year-to-date holiday taken exceeds what you've accrued at termination, the employer can recover the overpayment from your final pay run — but ONLY if:
- The contract or holiday policy explicitly says they can, AND
- The amount is clearly documented in writing
Without an explicit recovery clause, your employer cannot deduct overtaken leave from final pay. Many contracts include the recovery clause; some don't.
Holiday during notice / garden leave
Some employers require you to use accrued holiday during the notice period or garden leave. This is permitted under WTR if the employer gives sufficient notice (typically twice the length of the leave period).
If holiday is taken during notice: - Paid at normal rate (same as if you'd taken it earlier) - Reduces the holiday balance for final-pay-run payout - The notice period continues to count as service
If your employer requires this and you don't take the holiday, it doesn't roll over — you risk losing it under WTR rules. So if the employer schedules holiday during your notice, generally take it.
Common errors to watch for in your final pay run
- Holiday paid at basic rate only when your normal pay includes regular commission/overtime/bonus
- Wrong accrual period (using calendar year when contract specifies April-March)
- Days taken miscounted (employer using a stale figure rather than current)
- Holiday rolled into "redundancy lump sum" (incorrect tax treatment)
- Failure to pay accrued leave from previous year (carried-over leave still owed if it was carried over with permission)
- No payment for accrued bank holidays when contract treats them as extra
For each error, raise it with payroll in writing before final pay clears. After payment, recovery is harder.
Worked example — full termination package breakdown
£50,000 salary, 6 years' service, terminated 8 months into leave year, 20 days taken of 28-day entitlement, contractual 8-week notice (PILON):
| Element | Gross | Tax + NI | Net |
|---|---|---|---|
| Statutory redundancy | £4,038 | £0 (under £30k) | £4,038 |
| Notice pay (PILON, 8 weeks) | £7,692 | ~£2,308 | £5,385 |
| Holiday accrued (~19 days, minus 20 taken = -1 day) | — | — | — (none owed) |
Note: at 8/12 months, accrued is (240/365)×28 = 18.4 days. Already taken 20 → no holiday owed at termination. (Some contracts would recover the 1.6 days overpaid; many would let it pass.)
A different scenario: only 10 days taken at this point would mean (18 - 10) = 8 days holiday owed: - 8 × (£50,000 / 260) = £1,538 gross - Net after tax + NI: ~£1,108
Practical checklist
- Confirm your leave year in your contract (April-March, January-December, employment-anniversary)
- Calculate days accrued to termination date pro-rata
- Subtract days already taken in the current leave year
- Confirm normal day rate includes regular variable elements (commission, regular bonus, regular overtime)
- Verify holiday is taxed correctly — fully taxed + NI'd, not inside £30k threshold
- Check bank holiday treatment matches your contract
- Watch for overtaken-leave recovery — only valid if contract permits
In short
Holiday accrued at termination must be paid out at your normal contractual day rate (not basic-only). It's fully taxable and NI'd, outside the £30,000 redundancy threshold. Calculation is straightforward: pro-rata days accrued, minus days taken, times normal day rate. Verify against your contract; raise discrepancies with payroll in writing before final pay clears. For the broader cluster see the redundancy hub → and worked package examples in redundancy pay examples →.