Buying annual leave: the ultimate guide to holiday purchase schemes

Annual leave is an important part of your employees’ compensation packages. While holiday allowance is often something potential employees will look at before accepting a job offer, holiday purchase schemes can be another way to entice and retain talent – and they can prove fruitful for employers too, when implemented in line with employment laws.

As well as providing the option to buy extra annual leave days, such schemes can also give employees the opportunity to sell unwanted holiday days for extra money – a great option for those saving money for a big purchase.

This article will explore what holiday purchase schemes are, the benefits and risks of implementing them at your business, and how to calculate the cost of an employee’s day rate.

What is a holiday purchase scheme?

Holiday purchase schemes allow employees to “buy” extra days of unpaid leave. If an employee chooses to buy extra annual leave, their salary is reduced by the number of days that they have taken in a pay period to reflect the unpaid days of leave.

Such schemes are salary sacrifice arrangements. Employees agree to exchange a portion of their gross monthly salary in exchange for a non-cash benefit – in this instance, extra annual leave.

The amount of salary sacrificed depends on the employee’s contract, pay, and how many days they want to purchase.

Employers can also introduce holiday exchange schemes, which enable employees to “sell” unwanted holiday days back to the business. With this option, an employee gives up some of their holiday allowance but receives extra pay from their employer.

Employers can cap the amount of annual leave staff can buy or sell, too.

What are the employment laws and rules surrounding holiday purchase schemes?

Any potential holiday purchase that would take an employee’s pay below the National Minimum Wage is against the law, so it’s really important that employers with staff working at this rate cap their holiday purchase allowance at the appropriate number of days.

It’s also essential to consider eligibility for holiday purchase schemes. For example, employees who are still in their probationary period are usually excluded from any holiday purchase scheme policy.

For employers who allow employees to sell annual leave days as part of their scheme, it’s important any sold days do not take them below the statutory minimum holiday entitlement – an important employment law.

To work out this minimum holiday entitlement, calculate the number of days an employee works in a week and multiply it by 5.6. For example, if an employee works five days a week, their statutory paid holiday is 28 days a year because 5 x 5.6 = 28.

Many companies deduct the eight UK bank holidays in a typical year from this allowance, which means employees have 20 days of annual leave of their choosing.

Read more: How flexible bank holiday policies work

What are the benefits for both employers and employees?

Let’s look at the benefits of implementing a holiday purchase scheme at your business. The most obvious benefit is employee satisfaction, as it gives them greater control and flexibility over their annual leave – therefore improving staff morale.

Allowing annual leave purchases can also help improve your staff’s work/life balance and wellbeing, which decreases the chance of them taking sick leave days in the future.

There’s also the fact that employers save money on National Insurance Contributions (NIC) when employees purchase more annual leave, because – as the scheme means the employee is sacrificing some of their monthly pay – companies won’t be paying their full salary. It’s also a great perk to retain and attract talent.

For staff wanting to sell some of their holiday allowance, the benefits include getting additional income to help save for a big purchase, like a house deposit. This option suits those who don’t feel they need their full allowance and would prefer extra financial compensation instead.

If you’d like your team to take more time off, you could also allow them to carry over unused annual leave into the next year, or even try out an unlimited holiday scheme.

What are the cons or risks for employers and employees?

There are three key risks to consider with holiday purchase schemes:

1. Breaching statutory minimum annual leave entitlement
2. Breaching employment contracts
3. Non-compliance with National Minimum Wage

As mentioned, it’s imperative that your employees receive the statutory annual leave allowance and National Minimum Wage – if they don’t, your company is breaking the law. It’s also important to ensure the holiday purchase scheme operates in line with employment contracts at your business.

Details to include in these contracts could include how many days employees are allowed to purchase or sell in a year, under which conditions are they eligible to do so, and how much notice they need to give – with the latter point helping business owners to manage cash flow, too.

For employees, risks include regretting buying the annual leave and struggling to make ends meet with their reduced pay, or wishing they hadn’t sold their annual leave come the end of the year when they’re feeling more tired and in need of a break.

If you do adopt these schemes, you should encourage employees not to take the decisions lightly and to ensure they have a full understanding of the salary they will take home after purchasing annual leave.

How can I calculate an employee’s day rate?

Whether employees want to buy or sell annual leave, employers will need to calculate their day rate – in the case of buying one day of annual leave, for example, one day’s rate would be deducted from the employee’s monthly pay. In the instance of an employee selling annual leave, this day rate would need to be paid to the employee on top of their usual pay.

Let’s look at the calculation for this:

(The number of days they work per week) multiplied by (52 weeks per year) = the number of working days in the year

For example, a full-time employee working five days per week will work 260 days a year because (5 x 52 = 260). To work out their day rate, the calculation is:

(Employee’s annual salary) divided by 260 = the day rate

For an employee earning £30,000 per annum, this would mean a day rate of £115.38 (30,000 divided by 260).

Final thoughts

Holiday purchase schemes are a great way to give employees more control over their annual leave, be it buying more or selling some of their allowance. These schemes are simple to implement – just be sure to outline the details in employment contracts and employee handbooks.

Remember, requests to buy or sell annual leave are resolved at the employer’s discretion and you aren’t obliged to accept every request.

Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, UKTN and Maddyness UK. She also works closely with agencies to develop content for their startup and scaleup clients.