Holiday pay has been one of the most confusing areas of UK employment law for years — especially for irregular-hours workers, agency staff and part-year employees such as term-time teachers. Reforms that took effect for holiday years beginning on or after 1 April 2024 settled the rules, bringing back the 12.07% method and making rolled-up holiday pay legal again. This guide explains how it works in 2025-26.
Statutory Holiday Entitlement — The Starting Point
Under the Working Time Regulations 1998, every worker is entitled to 5.6 weeks of paid annual leave each year — equivalent to 28 days for a full-time 5-day-a-week worker (including bank holidays if your employer chooses). Part-time workers get a pro-rata share.
Holiday pay is supposed to match what you would have earned if you had worked. For salaried staff with regular hours this is easy — you are paid your normal salary while on holiday. For workers with variable hours it is much harder.
The 12.07% Rule — Where Does It Come From?
The figure 12.07% is simple arithmetic:
$$\frac{5.6 \text{ weeks leave}}{52 - 5.6 \text{ working weeks}} = \frac{5.6}{46.4} = 0.1207 \approx 12.07%$$
In other words, every hour you work earns you 0.1207 hours (about 7.24 minutes) of paid holiday. Applied to pay instead of time, 12.07% of each pay packet represents holiday pay.
Worked Example — Bar Worker
Jamal works variable shifts at a pub at £13/hour. In the week ending 4 May 2025 he works 32 hours.
- Hours worked: 32
- Hourly rate: £13.00
- Pay for hours worked: £416.00
- Holiday pay accrued at 12.07%: £416.00 × 0.1207 = £50.21
Over a full holiday year, the 12.07% top-up adds up to the same 5.6 weeks of paid leave that salaried colleagues receive.
Who Can Use the 12.07% Method?
From holiday years beginning on or after 1 April 2024, the 12.07% method (and rolled-up holiday pay) is only permitted for two categories of worker:
- Irregular-hours workers — people whose paid hours are wholly or mostly variable (e.g., casual, zero-hours, bank staff).
- Part-year workers — people who only work part of the year under a continuing contract (e.g., term-time-only school staff, seasonal workers).
Everyone else — including regular part-timers on fixed hours — must have holiday pay calculated using the older 52-week averaging method or their contractual salary.
Rolled-Up Holiday Pay — Now Legal Again
“Rolled-up” holiday pay means your holiday pay is paid with each wage packet as a 12.07% enhancement, rather than when you actually take leave. The European Court of Justice declared this unlawful in 2006, but the UK government reinstated it for irregular-hours and part-year workers from April 2024.
To use rolled-up holiday pay lawfully, employers must:
- Pay the 12.07% uplift on every pay slip, itemised separately
- Show it clearly — a lump sum hidden in a basic rate will not comply
- Still allow workers to take their 5.6 weeks unpaid (as the pay has already been given)
Rolled-Up vs Accrued — Side by Side
| Feature | Accrued (52-week) | Rolled-up (12.07%) |
|---|---|---|
| Who can use it | Any worker | Irregular-hours / part-year only |
| When paid | When leave is taken | With each pay slip |
| Shown on payslip | Separate holiday payment | Separate 12.07% line |
| Cash flow for worker | Smooth during holiday | Boosts each payslip |
How Is Holiday Pay Taxed?
Holiday pay is ordinary earnings. It is subject to:
- Income Tax via PAYE at your marginal rate
- Employee National Insurance (Class 1) at 8% main / 2% upper in 2025-26
- Employer National Insurance at 15% (2025-26 rate, increased from 13.8% in April 2025) above the Secondary Threshold of £5,000
- Student loan deductions, if applicable
- Pension auto-enrolment contributions on qualifying earnings
Because rolled-up holiday pay is paid every period, it can push low-paid workers above tax and NI thresholds earlier in the year than they expect. Conversely, accrued holiday pay paid in a single lump sum during a holiday can trigger higher-rate deduction in that month under the cumulative PAYE system — but this usually evens out across the tax year.
Worked Example — Tax on a Holiday Lump Sum
Priya is a regular employee paid £3,500/month. In August she takes 2 weeks holiday and is paid an extra £1,615 on top of her salary (2 weeks’ pay). Her August gross is £5,115. PAYE on a cumulative 1257L code treats this as if her annual earnings had risen, and she pays approximately:
| Deduction | August amount |
|---|---|
| Income Tax (cumulative) | ~£862 |
| Employee NI | ~£324 |
| Net August pay | ~£3,929 |
By the end of the tax year the overall deduction evens out — if her total earnings for 2025-26 remain in the basic rate band, no refund is due; if they drop back she may receive one through PAYE adjustments.
Common Pitfalls
- Regular overtime (contractual or non-guaranteed but regular) must be included in the holiday-pay average for the first 4 weeks of leave. Employers often forget this.
- Commission that is intrinsically linked to work must also be included.
- Bank holidays count towards the 5.6-week entitlement only if your employer chooses — not automatically.
- Carry-over of unused leave is limited: 1.6 weeks cannot be carried, 4 weeks can in limited cases (sickness, parental leave).
Key Takeaways
- 12.07% is the holiday-pay uplift for irregular-hours and part-year workers.
- Rolled-up holiday pay is lawful again from April 2024 — but only for those same workers, and only if itemised on payslips.
- Holiday pay is taxed as normal earnings through PAYE.
- Regular overtime and commission must be included in the holiday-pay calculation.
- Employers of regular part-timers cannot use 12.07% — they must use the 52-week averaging method.
Estimate your accrued or rolled-up holiday pay with our holiday pay calculator and see the PAYE impact on your payslip using the take-home pay calculator.