When a UK employee leaves, you must pay them for any accrued but untaken statutory holiday. The formula: annual entitlement × (weeks worked ÷ 52) = days accrued, then subtract days already taken to get the outstanding balance. If they took more than they accrued, you can only deduct from final pay if it's stated in the contract.
The calculator uses the rules set out below. Read on to understand the legal basis and edge cases.
The legal basis
The right to be paid for accrued but untaken holiday on termination sits in regulation 14 of the Working Time Regulations 1998. It applies whenever a worker's employment ends - whether by resignation, dismissal, redundancy, or the end of a fixed-term contract - and there is no qualifying period. Holiday accrues from day one of employment and gets paid out on day one of leaving if untaken.
ACAS sets out the rule plainly: an employer must pay in lieu for any untaken statutory holiday entitlement, and may only deduct excess holiday from final wages where this is agreed in the contract or in writing beforehand.
The accrual formula
The starting point is straightforward. By the time someone leaves, they will have accrued a portion of their full annual entitlement based on how much of the leave year they were employed. (If you need a refresher on how the underlying entitlement is set, see our guide to UK annual leave entitlement.)
Whether the result is positive (you owe pay) or negative (excess taken) determines what happens next.
Worked example
Here is the example from ACAS guidance, broken down step by step. Jo starts on 1 January, works 5 days a week, gets the statutory 5.6 weeks (28 days), and leaves after 26 weeks having taken 5 days of leave. Their daily pay rate is £150.
26 ÷ 52 = 0.5 (50%)
28 × 0.5 = 14 days accrued
14 - 5 = 9 days outstanding
9 × £150 = £1,350 to add to final pay
Three scenarios at termination
When you do the maths, the answer falls into one of three categories. Each has different implications:
When you can (and can't) deduct excess holiday
The third scenario is where most disputes arise. An employee leaves three months into the year having already taken their full annual holiday in January. Can you claw back the excess from their final pay?
Per ACAS, both of the following must be true:
- The employee has taken more holiday than they accrued by the leaving date
- The right to deduct is set out in the employment contract or agreed separately in writing
What the deduction clause should say
A workable clause needs to cover three things: that excess holiday taken at termination will be calculated against entitlement accrued; that the employee authorises deduction from final pay (or any other monies owed); and the daily rate that will be used for the calculation. The clause should be brought to the employee's attention at offer stage so it cannot later be challenged as a surprise term.
What pay rate to use
For workers on a fixed salary with predictable hours, holiday pay is at their normal weekly rate. The daily rate is simply that weekly figure divided by the days they normally work each week.
For anyone whose pay varies - including those receiving regular overtime, commission, bonuses, or shift premiums - the calculation is more involved. ACAS guidance requires you to use a 52-week reference period:
Notice period: take the holiday or pay in lieu?
If an employee is on notice with accrued holiday outstanding, you typically have three options:
| Option | How it works | When to use it |
|---|---|---|
| Let them take it during notice | Employee uses outstanding leave before their last day. No pay in lieu needed. | When you don't need their work during notice (e.g. handover is done). |
| Require them to take it | You can compel use of holiday in the notice period if you give notice equal to twice the leave you're requiring them to take. | When you want to clear the balance and prefer time-off to a cash payment. |
| Pay in lieu in final wages | Employee works the notice period; outstanding leave is paid out at termination. | When you need their full attention to handover or active work. |
Edge cases: sickness, maternity, bank holidays
Long-term sickness
An employee on long-term sick leave continues to accrue statutory holiday throughout their absence. If they couldn't take it during the leave year because of sickness, they can carry it forward (with limits) and any remaining accrued leave still gets paid out on termination.
Maternity, paternity, and shared parental leave
Holiday continues to accrue throughout statutory family leave. ACAS guidance confirms this includes bank holidays where these are part of the contractual entitlement. Anything accrued but not taken at termination must be paid in lieu.
Bank holidays
Whether bank holidays count toward the leaver calculation depends on the contract. If the employee's 28-day entitlement is "inclusive" of bank holidays, they're already in the formula. If the contract is "20 days plus bank holidays", you need to apply the same proportion to the bank holiday allowance separately and add it back.
Tax and National Insurance
Pay in lieu of accrued holiday is treated as ordinary earnings for tax and National Insurance purposes. It goes through PAYE in the normal way and is subject to income tax and Class 1 NICs at the employee's usual rate. This is different from a payment in lieu of notice (PILON), which has its own rules under ITEPA 2003 and is also generally taxable but warrants separate treatment in the contract.
HMRC's PAYE thresholds and NIC rates apply as normal. Don't apply the £30,000 termination payments tax exemption to holiday pay - the exemption only covers genuine ex-gratia or compensation payments, not contractual or statutory entitlements.
Common mistakes
| Mistake | The fix |
|---|---|
| Deducting excess holiday without a contract clause | Always check the contract first. Without an explicit deduction clause, the excess is yours to absorb. |
| Using basic pay only when calculating holiday pay | For variable workers, include regular overtime, commission, and shift premiums via the 52-week average. |
| Forgetting to apply the £30k exemption rule | The exemption does NOT apply to holiday pay - that figure is fully taxable as earnings. |
| Paying in lieu of holiday during employment | Only legal at termination. During employment you must give time off, not money. |
| Using calendar days instead of a leave-year proportion | Use weeks worked ÷ 52 (the standard ACAS formula). Calendar-day calculations can give odd results. |
| Forgetting that part-time leavers use their own pro-rata | A 3-day-a-week leaver uses the same weeks-worked formula but against their pro-rated entitlement (16.8 days, not 28). Our part-time entitlement guide covers the calculation. |
| Ignoring carried-over leave from the previous year | If carry-over was permitted (or required for sickness/maternity), add it to the accrued total. |
Sources
This guide draws entirely on official UK government and statutory sources:
| Source | What it covers |
|---|---|
| ACAS - How holidays affect final pay | The core rule on pay in lieu and the deduction conditions. |
| ACAS - Checking holiday entitlement | The standard accrual example used throughout this article. |
| ACAS - Calculating holiday pay | Normal pay rate, 52-week reference period, what to include. |
| Working Time Regulations 1998 (reg 14) | The statutory basis for compensation on termination. |
| GOV.UK - Holiday pay basics | The general framework for paid annual leave. |
| GOV.UK - Holiday entitlement calculator | Official calculator for complex leave-year arrangements. |
| HMRC - PAYE thresholds and NIC rates | Tax and NIC treatment of payment in lieu. |
Frequently asked questions
The questions UK employers ask most often when an employee with unused leave is about to leave.
Do employees get holiday pay if they're sacked?
Yes. Even if dismissed for misconduct or gross misconduct, employees are still legally entitled to be paid for any accrued but untaken statutory holiday. The right to pay in lieu under regulation 14 of the Working Time Regulations 1998 applies regardless of how the employment ends.
Can I deduct excess holiday from final pay?
Only if the employment contract or a separate written agreement explicitly permits the deduction. Without that clause, you cannot recover the excess - making the deduction anyway could trigger an unlawful deduction of wages claim under the Employment Rights Act 1996. Always include a "deduction of overpaid holiday" clause in your contracts to protect this position.
Is holiday pay on termination taxable in the UK?
Yes. Pay in lieu of accrued holiday is treated as ordinary earnings, processed through PAYE and subject to income tax and Class 1 NICs at the employee's normal rate. The £30,000 termination payments tax exemption does not apply - it only covers genuine compensation payments, not statutory or contractual entitlements.
What if the employee leaves without notice?
They are still entitled to be paid for any accrued but untaken statutory holiday up to the date their employment ends. You don't have to pay for the unworked notice period (and may have a separate claim for breach of contract), but the holiday pay obligation is unchanged.
Can I require an employee to take their holiday during their notice period?
Yes. Under the Working Time Regulations, an employer can require workers to take statutory holiday on specific dates by giving notice equal to twice the length of the leave being required (e.g., 10 working days' notice to require 5 days of leave). This is a common way to reduce the final-pay liability for unused leave.