Holiday Pay When an Employee Leaves: The UK Rules

An employee resigns in September. Their leave year runs January to December. They have taken nine days. How many days of holiday pay go into their final payslip — and what happens if the answer is negative?

Final-pay holiday calculations produce more payroll disputes than almost anything else, partly because the arithmetic is fiddly and partly because two of the rules are counter-intuitive: you must pay out untaken leave, but you usually cannot claw back over-taken leave. This guide walks through the formula, the pay rate, and the clause that decides whether you can recover an overpayment.

The Basic Rule

Under regulation 14 of the Working Time Regulations 1998, when employment ends part way through a leave year, the worker is entitled to a payment in lieu of any statutory holiday that has accrued but not been taken.

This is worth pausing on, because it is the exception to a general prohibition. During employment, statutory holiday cannot be paid in lieu — the entitlement exists so people actually rest. Termination is the one moment where cash replaces time off.

It applies however the employment ends: resignation, dismissal, redundancy, or the expiry of a fixed-term contract. Even in a gross misconduct dismissal, accrued holiday is still payable.

The Regulation 14 Formula

The statutory calculation is:

Worked Example

Take the employee above: 28 days' entitlement, a calendar leave year, leaving on 30 September, nine days taken.

Round in the employee's favour, or at minimum do not round down — the regulations set a floor, and rounding against the worker takes them below it.

Note that this formula covers the statutory entitlement. If your contract gives more than 5.6 weeks, the contract decides how the extra days are treated on termination. Many contracts say enhanced leave is not paid in lieu; that is lawful, provided the statutory element is still paid.

What Rate Do You Pay It At?

Each week of untaken leave is paid at a week's pay, which should reflect the worker's normal remuneration — not just basic salary.

The 52-week reference period ignores weeks in which no pay was received — you skip them and go further back, up to a maximum of 104 weeks. Regular overtime and commission that form part of normal pay should be included. Our guides to holiday pay for zero-hours workers and paying part-time employees cover the awkward cases, and the zero hours holiday pay calculator handles the 12.07% method directly.

Payment for accrued leave is ordinary earnings for tax purposes: income tax and National Insurance apply through PAYE as normal.

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When the Employee Has Taken Too Much

This is where employers get caught. If someone has taken 20 days by September but only accrued 20.94 — fine. If they took all 28 days in January and resign in March, they are roughly 21 days overdrawn.

You can only recover that if you have a written agreement permitting it. Regulation 14(4) allows a "relevant agreement" — in practice a clause in the employment contract — to provide for repayment or deduction from final pay. Without that clause, you cannot make the deduction. Doing so anyway is an unlawful deduction from wages under the Employment Rights Act 1996, and the employee can recover it at tribunal.

The clause costs nothing to include and is worth thousands the first time a January-holiday employee resigns in March. If your contracts do not have one, that is the single most valuable change to make after reading this.

Two practical limits even where you do have the clause: the deduction must not take the employee below the National Minimum Wage for the final period worked, and it must be applied to the final payment rather than pursued as an open-ended debt without care.

Making Them Take It Instead

Often the better answer is to have the leave taken rather than paid. You can require an employee to take annual leave during their notice period by giving notice of twice the length of the leave, under regulation 15 — the mechanics are covered in our guide to requiring employees to take annual leave.

This works well for long notice periods and badly for short ones: to make someone take ten days, you need twenty days' notice, which a one-month notice period barely accommodates. Decide in the first week of the notice period, not the last.

A Leaver Checklist

1. Fix the leave year dates and the termination date.
2. Pull the leave record — every day taken in the current leave year, including half days.
3. Add any carryover brought in from the previous year.
4. Apply (A × B) − C to the statutory element.
5. Apply the contract to any enhanced entitlement above 5.6 weeks.
6. Work out a week's pay, using the 52-week average where pay varies.
7. If overdrawn, check for the deduction clause before deducting anything.
8. Process through PAYE as ordinary earnings.
9. Show the calculation on or with the final payslip — most disputes end there.

Don't Forget Carryover

The regulation 14 formula deals with the current leave year. It says nothing about days carried in from the previous one, and those are frequently missed in final pay.

If an employee brought forward five days under your carryover policy, those days are part of their available balance and must be accounted for. Where the carried-over days derive from statutory leave the employee was prevented from taking — typically because of long-term sickness or a period of family leave — the entitlement to be paid for them on termination is on strong ground.

Contractual carryover above the statutory minimum is governed by whatever your policy says, so check the wording. A policy that allows carryover but is silent on what happens at termination will generally be read in the employee's favour. Our guide to annual leave carryover rules covers which days can be carried and for how long.

Key Takeaways

• Accrued but untaken statutory holiday must be paid on termination — regulation 14
• The formula is (A × B) − C, applied to the statutory 5.6 weeks
• Contractual leave above the statutory minimum is governed by the contract
• Pay at a week's pay, using a 52-week average where pay varies
• You cannot recover over-taken leave without a written agreement allowing it
• Requiring leave during notice is often better than paying it out — but decide early
• The payment is taxable earnings, not a termination payment

Frequently Asked Questions

Sources

• Working Time Regulations 1998, regulation 14 — legislation.gov.uk
• Holiday pay when you leave a job — GOV.UK