Holiday Pay Tax 2026/27 — PAYE, Rolled-Up Pay & Termination

Holiday pay is taxed exactly like normal earnings: it runs through PAYE, with income tax and National Insurance deducted before the money reaches you, and there is no special "holiday tax rate" to plan around. For the 2026/27 tax year the main questions are practical ones — how accrued holiday pay is calculated for irregular and zero-hours workers, how the 12.07% rolled-up method works, and how untaken holiday is taxed when you leave a job. See what your holiday pay nets after tax with the Holiday Pay Calculator→, and check your wider take-home position with the Salary Calculator→.

The rules that matter: most workers are entitled to up to 5.6 weeks of paid statutory holiday (28 days for a five-day worker), but the calculation for irregular-hours and part-year workers depends on the leave year and the post-2024 accrual rules. Any untaken holiday paid on termination is earnings; it does not use the £30,000 termination-payment exemption.

Tax and employment entitlement are separate checks. PAYE tells payroll how to deduct tax when holiday pay is paid; the Working Time Regulations and the contract determine how much leave and pay the worker has earned. A payslip can therefore be taxed correctly while the underlying holiday calculation is wrong, or a correct entitlement can be paid in a period where the tax code produces an unusual deduction. Check both questions separately.

How Holiday Pay Is Taxed

The deductions use the normal payroll rules: Income Tax depends on your tax code and cumulative position, employee National Insurance uses the applicable thresholds and rates, and student-loan deductions depend on the plan. For 2026/27, ordinary employee Class 1 NI is generally 8% between the primary threshold and upper earnings limit and 2% above. Because holiday pay is usually paid with ordinary pay, the amounts are processed together; a final-pay payment can therefore affect the period’s deductions without creating a special holiday tax rate.

Statutory Holiday Entitlement

The 5.6 weeks figure comes from the Working Time Regulations: 28 days for a five-day worker, scaled for other working patterns. Bank holidays can be included in the statutory entitlement. Employers can use rolled-up holiday pay only for eligible irregular-hours and part-year workers for the relevant leave years; regular-hours workers must receive holiday pay when leave is taken.

Rolled-Up Holiday Pay for Irregular Workers

For eligible irregular-hours and part-year workers, an employer may use rolled-up holiday pay rather than paying holiday pay when leave is taken. The employer adds 12.07% of total pay for the pay period, representing 5.6 weeks of statutory leave divided by 46.4 working weeks. The employer can instead use the permitted 52-week reference-period method.

The rolled-up amount is added to gross pay for the period and taxed in the same PAYE run, so a £500 week with £60.35 of holiday pay produces a gross of £560.35 before payroll deductions. Employers should show the holiday element separately, and the method is only permitted for eligible irregular-hours or part-year workers under the relevant leave-year rules.

Accrual and Part-Time Workers

Holiday entitlement accrues from the first day of employment, but the method depends on the worker’s hours and the leave year. A regular-hours worker who joins mid-year receives the relevant part-year entitlement. For eligible irregular-hours and part-year workers with leave years beginning on or after 1 April 2024, entitlement is generally 12.07% of hours worked in each pay period, subject to the statutory maximum. Sick and family-related leave can affect carry-over and accrual under specific rules. On termination, the employer must calculate payment for accrued but untaken leave under the applicable Working Time Regulations and contract terms; it is not always simply the worker’s last hourly rate.

The leave-year start date is a key control. The post-1 April 2024 accrual method and rolled-up holiday pay apply to eligible irregular-hours and part-year workers whose leave year begins on or after 1 April 2024. A worker with a leave year beginning earlier may remain under the earlier calculation until the leave year renews. Do not apply 12.07% solely because a worker is paid weekly or has a zero-hours label; test the contractual hours and the leave-year rule.

For holiday pay, regular-hours workers generally receive at least four weeks at their normal rate and the remaining 1.6 weeks at the basic rate, while irregular-hours and part-year workers’ statutory leave is paid at the normal rate under the current guidance. Normal pay can include regular overtime, commission and payments linked to length of service or professional qualifications. A bonus is not automatically included or excluded: its regularity, contractual basis and relationship to the work should be reviewed. Keep the calculation showing which pot of leave was used.

When hours vary, use the applicable 52-week averaging method and count only weeks in which the worker was paid, subject to the permitted look-back. A worker with gaps in employment may require the employer to count back to earlier paid weeks rather than inserting zeroes. This is an employment-law calculation, not a shortcut based on the last payslip. Payroll should retain hours, pay, leave taken, leave carried over and the calculation used for each payment.

Holiday Pay on Termination

When you leave a job with untaken statutory holiday, the employer must pay it in lieu. That payment is treated as earnings — taxable in full through PAYE, with income tax and NI deducted in the final pay run. This matters because termination payments have a £30,000 tax-free exemption, but accrued holiday pay is specifically excluded from it: you cannot shelter unused holiday inside the £30,000. A worker with £4,000 of accrued holiday plus a £20,000 redundancy payment therefore pays tax on the full £4,000 holiday element, while the £20,000 redundancy package stays within the exemption.

Real Example: Final Pay Packet

Nadia leaves her job with £1,500 of accrued holiday, a £12,000 termination payment and a final month's salary of £2,000. Her final pay packet is £15,500 before tax.

The £12,000 termination payment is within the £30,000 qualifying-award limit in this simplified example, while the £3,500 of salary and holiday pay is taxed in the normal way. Actual PAYE and NI cannot be inferred from the annual 8% headline rate alone because payroll thresholds and the tax code apply.

Employer Obligations

Employers must include holiday pay in Real Time Information submissions and deduct tax and NI under PAYE in the period it is paid. For terminated employees, the accrued-holiday element is earnings, not a qualifying termination award; the standard employer National Insurance rules apply, including the 15% rate above the secondary threshold for 2026/27. Employers must also keep detailed annual-leave and holiday-pay records for at least 6 years from 6 April 2026.

From 6 April 2026 the detailed record must be kept for at least six years from the date it was made. The record should show annual leave days taken and holiday pay paid, alongside enough payroll and contract information to explain the result. A worker’s annual leave record should not be replaced by a single year-end total if the employer cannot reconstruct how the pay was calculated. The employer can choose the storage system, but must be able to produce an intelligible record if challenged.

Action Plan for Workers and Employers

Workers should reconcile their payslip every payday: where rolled-up pay is used lawfully, the holiday element should be calculated from the relevant total pay for the pay period and shown separately. Employers should review their holiday policy to confirm only eligible irregular-hours or part-year workers use rolled-up pay, that part-time entitlements are recalculated when hours change, and that termination runs separate accrued holiday pay from any qualifying termination award before RTI is submitted.

Frequently Asked Questions

Check your final pay packet with the Holiday Pay Calculator→, then read the Termination Payments 2026/27 guide for the £30,000 rules and the Statutory Sick Pay guide for other leave entitlements. Whether you are an employee checking a payslip or an employer running payroll, the golden rule is simple: holiday pay is earnings, so tax it like any other money you pay or receive.

Official sources

• GOV.UK: Holiday entitlement — calculate leave entitlement
• GOV.UK: Holiday entitlement — holiday pay
• GOV.UK: Holiday pay and entitlement reforms from 1 January 2024
• GOV.UK: Rates and thresholds for employers 2026 to 2027