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.
If you only need the number of days or hours of leave — not the pay — use the holiday entitlement calculator; for the £ value, the holiday pay calculator covers rolled-up pay and the 52-week average.
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 — is paid a week’s pay for each week of leave they take (your normal weekly pay if your pay does not vary with the work done, even on a regular shift pattern; a 52-week average only where it does), and cannot be given rolled-up holiday pay.
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 at the same time as the pay for the work done, on every pay slip, with the holiday pay amount shown on the itemised payslip
- Show it clearly — the payslip must indicate the amount of holiday pay paid, so 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, a lump sum of holiday pay in one month raises that month’s National Insurance (which is worked out period by period), whereas cumulative PAYE tax is worked out on your pay to date, so any over- or under-deduction 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) | ~£813 |
| Employee NI | ~£270 |
| Net August pay | ~£4,032 |
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 depends on your contract: the extra 1.6 weeks (8 of 28 days) can be carried over only as far as the contract allows. Leave you could not take because of sickness carries into the next year up to the 4 weeks (20 of 28 days) for a regular-hours worker, and in full for an irregular-hours or part-year worker, to be taken within 18 months of the end of the leave year; leave you could not take because of family-related leave carries over in full. Workers whose employer did not recognise their right to leave or holiday pay, or did not give them a reasonable chance to take leave, can carry it over: all the untaken leave for an irregular-hours or part-year worker, and the 4 weeks (20 of 28 days) for a regular-hours worker.
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 pay a normal week’s pay for each week of leave, and the 52-week average applies only where pay or hours vary.
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.