Holiday Pay Explained: A Complete Guide for Employers, Employees, and Contractors

When it comes to payroll, few topics cause as much confusion – and frustration – as holiday pay. If you’re an employer, you want to get it right to stay compliant and keep your team happy. If you’re an employee or contractor, you want clarity around what you’re entitled to.

At Riddingtons Payroll, we specialise in cutting through the jargon and making payroll simple. So let’s lift the lid on holiday pay: who gets it, how it’s calculated, and the nuances every business and worker should be aware of.

What Is Holiday Pay?

Holiday pay is the pay an employee is entitled to while taking statutory annual leave. In the UK, employees must receive at least 5.6 weeks of paid holiday per year. For a full-time worker, that works out to 28 days (including Bank Holidays, if the employer chooses to count them).

The principle is simple: workers shouldn’t lose earnings because they exercise their legal right to time off. However, in practice, calculating holiday pay isn’t always straightforward – especially when overtime, allowances, commission, or irregular hours are involved.

Holiday Pay Isn’t Always “Basic Pay”

One of the common pitfalls employers make is assuming holiday pay is just a flat payment of someone’s usual wages. UK case law has clarified that holiday pay should reflect “normal remuneration”, which means:

• Regular overtime (beyond merely occasional) may need including.
• Shift allowances, bonuses, and commission can be factored in.
• Workers on zero-hour contracts or irregular schedules must have their entitlement averaged over a reference period (currently 52 weeks).

This ensures holiday pay reflects a worker’s actual earnings pattern, not just a bare minimum.

Holiday Pay for Contractors – A Common Grey Area

Here’s where things get particularly interesting. Contractors, freelancers, and agency temps often assume they aren’t entitled to holiday pay – but that isn’t always the case.

• Self-employed contractors who are genuinely “in business on their own account” typically don’t receive holiday pay. Their holiday cost is built into the fees they charge.
• Agency workers (or contractors working through an umbrella company) often are entitled under UK law. Agencies or umbrella payroll providers must account for this, usually by spreading holiday pay entitlement across payslips or holding it in a “holiday pot.”
• IR35 status matters: Contractors working “inside IR35” can find themselves in pseudo-employment, where holiday pay and other rights come into play. Getting professional payroll advice here is crucial.

The key takeaway? Not all “contractors” are treated equally. If you’re hiring contractors – or are one – it’s worth double-checking your arrangements to avoid costly disputes.

The Risk of Getting It Wrong

Holiday pay is more than just ticking a compliance box. A misstep can mean:

• Claims in Employment Tribunals – workers can challenge underpayments.
• Expensive back-pay liabilities – underpaid holiday can build up over years.
• Damaged reputation – payroll errors around holiday pay hit morale and trust faster than you’d think.

How Riddingtons Payroll Can Help

At Riddingtons, we handle the complexity so you don’t have to. Whether it’s:

• Ensuring your business complies with evolving holiday pay legislation.
• Advising on calculations for zero-hours and irregular hours staff.
• Clarifying the holiday pay rights of contractors.
• Avoiding costly back-pay risks.

We bring peace of mind and precision to your payroll.

Final Thought

Holiday pay isn’t just a legal requirement – it’s part of building a fair, motivated workforce. Whether you’re an SME owner wrestling with contracts, or a contractor unsure of where you stand, tackling holiday pay properly is about safeguarding both compliance and trust.

At Riddingtons Payroll, we make sure payroll works for you – so holiday pay never keeps you awake at night.

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