Payroll update: Changes to the way holiday pay is calculated from April 2020

Published: Wednesday 18 September 2019

The vast majority of workers are entitled to a minimum of 5.6 weeks paid holiday per year.  This is an easy calculation if workers are paid a salary for a set number of hours per week, but things get complicated if hours and pay vary week by week.  What is an average week’s pay for them?

The current rules require an employer to look back over the previous 12 weeks (known as the holiday pay reference period).  If there is a week unpaid during this period, you replace it with an earlier paid week.  The 12 weeks are then averaged to come up with a figure for a week’s holiday pay. The basic principle being that the employee should not suffer financially for taking holiday.

It is worth noting here that holiday pay should be paid for the time when annual leave is actually taken. An employer cannot include an amount for holiday pay in the hourly rate (known as ‘rolled-up holiday pay’).

With the increase in the number of employees on zero hours contracts and the fact that many of these contracts are affected seasonally –with farm workers doing more hours in harvest time or those in retail working extra hours over Christmas for example - the Government undertook a review to see if this was still a fair average – it wasn’t.  

So, from April 2020 the holiday pay reference period is increasing to 52 weeks.

The Government plans to produce new guidance steps for employers on how to calculate holiday pay, as well as increasing awareness of holiday pay entitlements to both employers and workers.

In the meantime, employers should look at the way they record hours worked and pay per week to ensure that they have access to the information needed to do these calculations from April 2020.

Key contacts

Cheryl Baker
Cheryl Baker
Payroll Solutions Associate Director
View profile