One of the trickiest parts of an employee's departure is getting holiday pay right during the notice period. Whether someone has resigned, been made redundant, or been dismissed, you need to know how much holiday they've accrued, what they've already taken, whether you can require them to use remaining leave, and what ends up in the final pay packet. Get it wrong and you face underpayment claims, tribunal risk, or unnecessary overspend. This guide walks through every aspect UK employers need to understand.
Yes — this is a statutory right. An employee who is working their notice period remains employed in every sense. They continue to accrue annual leave under the Working Time Regulations 1998, and they retain the right to request time off just as they would at any other point in the year.
The employer can still approve or refuse a holiday request during notice using the normal rules. To refuse, the employer must give counter-noticeof at least the same length as the leave requested. For example, refusing a 4-day holiday request requires at least 4 days' notice of the refusal.
In practice, most employers approve reasonable requests. However, if the departure involves a critical handover, the employer has a legitimate business reason to refuse and can instead offer to pay any untaken leave in lieu at the end of employment.
Yes, with proper notice. This is one of the most commonly misunderstood areas. Under the Working Time Regulations, an employer can require an employee to take annual leave on specific dates. The catch is the double-notice rule: the employer must give notice equal to twice the length of the leave being imposed.
| Leave imposed | Advance notice required | Possible in a 4-week notice period? |
|---|---|---|
| 1 day | 2 days | Yes |
| 3 days | 6 days | Yes |
| 5 days (1 week) | 10 days (2 weeks) | Yes |
| 10 days (2 weeks) | 20 days (4 weeks) | Barely — must serve notice on day one |
| 15 days | 30 days | No — exceeds 4-week period |
If the notice period is too short to satisfy the double-notice rule for all remaining leave, the employer must pay in lieufor any days that cannot be imposed. This commonly happens with employees on short (1–2 week) notice periods who have large accrued balances.
Any instruction to take leave during notice must be given in writing, specifying the exact dates. Verbal instructions are enforceable in theory but create evidence problems if disputed.
When employment ends, the employer must calculate how much leave the employee has earned (accrued) up to their last day, subtract what they've already taken, and either pay or deduct the difference. This applies regardless of whether the employee resigned, was dismissed, or was made redundant.
Accrued entitlement = (Calendar days worked in leave year ÷ 365) × Annual entitlement
Then: Payment in lieu = Accrued entitlement − Leave already taken
Sarah has 28 days' annual leave per year. Her leave year runs January to December. She resigns and her last day is 30 June (181 days into the leave year). She has taken 8 days of leave so far.
| Step | Calculation | Result |
|---|---|---|
| Accrued entitlement | (181 ÷ 365) × 28 | 13.88 days |
| Leave already taken | — | 8.00 days |
| Payment in lieu owed | 13.88 − 8.00 | 5.88 days |
If Sarah earns £30,000 per year, her daily rate is £30,000 ÷ 260 working days = £115.38. The payment in lieu would be 5.88 × £115.38 = £678.43.
James has 25 days' entitlement. His leave year runs April to March. He resigns on 31 July (122 days into the leave year) having already taken 12 days of leave.
| Step | Calculation | Result |
|---|---|---|
| Accrued entitlement | (122 ÷ 365) × 25 | 8.36 days |
| Leave already taken | — | 12.00 days |
| Overpaid by | 12.00 − 8.36 | 3.64 days |
James has been overpaid by 3.64 days of holiday. Whether the employer can recover this depends on the contract — see the next section.
When an employee has taken more leave than they've accrued at the point of termination, the employer is left out of pocket. Recovery is legal but tricky, and the rules differ depending on whether the employee resigned or was dismissed.
Best practice:always include a holiday clawback clause in employment contracts. It is much easier to waive a right you have than to enforce one you don't.
Garden leaveis when an employee is instructed not to attend work during their notice period but remains employed and paid. It is not the same as annual leave — the employee is technically available for work if recalled, whereas a worker on annual leave is not.
The critical question is whether annual leave can run concurrently with garden leave, effectively reducing the holiday balance the employer must pay out at the end.
A common mistake is assuming that garden leave "absorbs" annual leave. Unless the contract says so or the employer gives proper notice under the Working Time Regulations, the employee will leave with their full holiday balance outstanding — and the employer will owe payment in lieu on top of the garden leave pay already given.
When employees are made redundant, their holiday pay rights are exactly the same as in any other termination. However, redundancy situations often create additional complications:
Redundancy pay itself is separate from holiday pay — one does not offset the other. The final pay packet must include both the statutory (or enhanced) redundancy payment and any accrued but untaken holiday pay.
For employees with fixed hours and fixed pay, calculating a day's holiday pay is simple: divide annual salary by the number of working days in the year (typically 260). But for workers with variable hours, overtime, commission, or regular bonuses, the employer must use a 52-week reference period.
Under the Working Time Regulations (amended in 2020), the reference period works as follows:
Following the landmark British Gas Trading v Lock and Bear Scotland v Fulton cases, holiday pay must reflect normal remuneration, not just basic pay. This includes:
Purely discretionary one-off bonuses and expenses reimbursements are notincluded. However, the line between "regular" and "discretionary" can be blurry, and tribunals will look at the substance rather than the label.
Priya works irregular shifts at a hospitality business. Her 52-week average (excluding 4 weeks of unpaid leave) gives a weekly pay figure of £480. She normally works 4 days per week, so her daily rate is £480 ÷ 4 = £120 per day.
She leaves 200 days into the leave year with 20 days' statutory entitlement. She has taken 7 days.
| Step | Calculation | Result |
|---|---|---|
| Accrued entitlement | (200 ÷ 365) × 20 | 10.96 days |
| Leave already taken | — | 7.00 days |
| Payment in lieu (days) | 10.96 − 7.00 | 3.96 days |
| Payment in lieu (£) | 3.96 × £120 | £475.20 |
Holiday pay in lieu is treated as earnings for tax and National Insurance purposes. It is nota termination payment and does not qualify for the £30,000 tax-free threshold that applies to redundancy payments and compensation for loss of office.
This means holiday pay in lieu must be:
A common error is to lump holiday pay in lieu together with a redundancy payment and apply the £30,000 exemption to the total. HMRC will challenge this and the employer could face penalties. Keep holiday pay and any termination payment as separate line items in the final pay calculation.
Based on the most frequent payroll and HR errors we see, here are the pitfalls to avoid:
Manually working out accrued leave, used days, payment in lieu, and overpayment clawbacks is time-consuming and error-prone — especially when you factor in part-time pro-rata calculations, carry-over rules, and variable leave years. LeaveManager handles all of it automatically: