Is rolled-up holiday pay legal and how is it taxed?

Full answer

Rolled-up holiday pay is a method of paying statutory holiday entitlement by adding an uplift to every payslip throughout the year, rather than paying the worker their normal wage only when they actually take annual leave. **The legal history** For a long period, rolled-up holiday pay was considered unlawful under UK case law (following the European Court of Justice decision in Robinson-Steele v RD Retail Services), because the Working Time Regulations were interpreted as requiring holiday pay to be paid at the time leave is actually taken, to properly encourage workers to take their rest. However, the Working Time (Amendment, Revocation and Transitional Provision) Regulations 2023 changed the law specifically for irregular-hours workers and part-year workers, permitting rolled-up holiday pay for holiday years starting on or after 1 April 2024. **Who it applies to** Rolled-up holiday pay under the new rules is only permitted for irregular-hours workers (whose paid hours vary significantly from pay period to pay period) and part-year workers (who do not work, and are not paid, for at least part of the year, such as some term-time-only staff). It is not generally permitted for workers with regular, fixed hours throughout the year -- for those workers the older approach of paying holiday pay only when leave is taken (or accruing a specific pot) still generally applies. **The 12.07% figure** The standard statutory holiday entitlement in Great Britain is 5.6 weeks a year. Expressed as a percentage of the other 46.4 working weeks in the year, this works out to approximately 12.07% (5.6 divided by 46.4). Employers using rolled-up holiday pay for eligible workers add this 12.07% uplift to every payslip, calculated on the worker's total pay for that period (including overtime and most other elements that count towards holiday pay), rather than paying it separately when leave is taken. **Requirement to show it separately** Where rolled-up holiday pay is used for an eligible worker, the amount must be clearly itemised as a separate sum on the payslip, so the worker can see exactly how much has been paid in lieu of holiday pay -- simply folding it invisibly into an hourly rate without disclosure does not meet the legal requirement. **How it is taxed** Because rolled-up holiday pay is simply part of the worker's ordinary pay for the period (just calculated with reference to a holiday entitlement formula), it is taxed no differently from any other earnings. Income Tax at the worker's marginal rate and Class 1 employee National Insurance (8% up to the upper earnings limit of £50,270, then 2% above) apply to the whole payment, including the 12.07% uplift, exactly as they would to basic pay or overtime. **Worked example** A zero-hours retail worker with genuinely irregular hours is paid £13.50 an hour under the new rolled-up system. Each payslip shows their basic pay plus a separately itemised 12.07% holiday pay uplift -- for 30 hours worked in a week, that is £405 basic pay plus roughly £48.88 rolled-up holiday pay, a total of £453.88 for that week, all of which is taxed through PAYE in the normal way, with no special holiday pay tax exemption.

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