Holiday entitlement and employment law for SMEs: everything you need to know

Holiday entitlement seems straightforward, but small business owners can find themselves in hot water if they don't know their legal responsibilities.

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Every employer knows that a worker is entitled to paid holidays. Beyond this certainty, the law gets a bit harder to understand, making it one of the more complex areas of HR best practice to stay on top of.

Still, it is a duty of care that employers must properly resesarch and understand their legal responsibilities when it comes to holidays. Doing so will ensure your workforce feels properly supported, and that the rules are clear for everyone involved.

Can you force an employee to take holiday? Can you buy back holiday from staff?

These are amongst the common questions the Startups team has heard from small business owners over the past two decades. Confusingly, they can have completely different answers depending on the contract type.

Below, we’ll answer these questions and more in our complete overview of UK holiday law, highlighting the different types of leave entitlements – including the rules around bank holidays – as well as any legal loopholes that employers should be aware of.

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UK Holiday Pay Statutory Entitlement

Under the Working Time Regulations 1998 act, all employees, regardless of contract type, are entitled to a minimum holiday entitlement of 5.6 weeks’ paid holiday pro-rata (that’s 28 days for someone working five days a week).

This time can include public holidays, such as Christmas, Easter and the few Bank Holidays we get in the UK, but it doesn’t have to.

Similarly, an employer can choose to offer more leave than the legal minimum as an incentive to staff. There are no legal requirements to do this so you can make up your own rules. Some companies choose to offer staff an extra paid holiday day for every year they work at the company, as an example.

Employees are also entitled to employee rest breaks throughout the day. Read our guide to: what are employee rest breaks?

How to calculate holiday pay:

For full-time workers: Most employees in the UK are full-time workers and will therefore have a fixed salary and fixed working hours. Their holiday pay requirement is simple. For each week of leave they take, they are entitled to a week’s worth of pay.

The limit on statutory holiday entitlement is 28 days. That means, even if an employee works 6 days a week, they will only be able to claim 28 days of holiday per calendar year.

For part-time workers: As holiday pay is paid pro-rata, part-time workers are entitled to fewer than 28 days, and it is correlated to their working hours each week.

Example: if a staff member works 2 days a week, they will get at least 11.2 days’ leave a year (2 × 5.6 = 11.2).

For irregular hours: Shift workers or term-time workers, and anyone else who works irregular hours, are entitled to paid time off for every hour they work. This is more difficult to calculate as the employee will likely not have a regular work schedule.

In this case, an employer will normally look back at renumerations from the worker’s previous 52 paid weeks (known as the holiday pay reference period) to work out what they would have been paid during that time off.

Example: if a staff member working irregular hours was paid £17,500 over the past 52 weeks, they would do the following calculation 17,500 ÷ 52 = 336. Their weekly holiday pay would therefore be £336.

For employees who have not worked at a company longer than 52 weeks, the employer should begin calculations from their first paycheck.

Accruing Holidays

The statutory holiday entitlement runs for 12 months, or what is known as a ‘leave year’. The employer decides when their leave year starts. For ease, many companies choose to run their leave year from 1 January to 31 December.

Businesses should tell their staff the dates of their statutory leave year as soon as they start working. That’s because an employee starts accruing time for paid holidays from their first day at a company.

Full-time workers get one-twelfth of their leave each month – although they can choose to take more than that at a time.

If a worker starts their job part-way through a leave year, they’re only entitled to part of their total annual leave for the current leave year.

Example: the leave year at a company begins on January 1, but an employee joins October 1. They’d be entitled to 7 days of leave (a quarter of the total leave year, or 28 ÷ 12 × 3).

Workers can still build up their holiday entitlement while off work sick. They can also accrue entitlement whilst on maternity, paternity, and adoption leave. We go into this in more detail in the section ‘Additional Leave Entitlements’.

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Use It or Lose It Holiday Policy

As the holiday entitlement resets at the beginning of the leave year, there is a chance that a staff member who does not take their allotted leave in full by the deadline will lose the right to take paid time off.

Whether or not an employee can carry over their holiday leave into the next leave year is up to the employer’s discression.

If nothing has been put down in writing as part of the employee contract, and assuming the worker is full-time who can take up to 28 days’ leave, the manager can agree to carrying over a maximum of eight days (although it’s more commonly capped at between three to five).

Should they be entitled to more than 28 days, the manager might agree to a worker carrying over additional untaken leave as an employee benefit.

Employers are also legally required to allow employees to carry over a maximum of 20 of their 28 days’ leave entitlement if they were unable to take a holiday due to being off sick.

What is ‘use it or lose it’?

If a staff member has not taken their maximum 28 days of statutory leave within the given 12-month period, the employer is entitled to instil a ‘use it or lose it’ policy. This means the worker will lose any outstanding holiday.

There are logical business reasons for introducing a use it or lose it policy. If the worker carries over 10 days’ holiday into the next year, they might take a huge block of time off work, interrupting workflow and impacting productivity.

However, use it or lose it policies are often not popular with employees as you’re essentially telling staff to forefit paid leave. The issue should therefore be handled sensitively with staff given a fair chance to take leave when they can.

Keep all details about the policy written down clearly in an staff handbook that the employee can access at all times and the guidelines are clear to everyone involved.

You can lower the risk of having to enforce ‘use it or lose it’ through encouraging staff to use their holiday entitlement before the end of the leave year. Do this by:

  • Responding positively when an employee books holiday
  • Ensuring your leave booking system is easy to use
  • Not overloading staff with work so they feel they don’t have time to go on leave

Remember that you have a duty of care as an employer to protect employee health and wellbeing. Encourage workers to take regular breaks throughout the year to ensure they do not feel burnt out or overwhelmed by their workload.

Required Notice for Taking Holiday

Generally speaking, employees should give you notice that they will be using their holiday allowance equivalent to twice the amount of time they are looking to take off. For example, if they want to take five days off they need to give 10 days notice.

How much notice does the employer need to give?

Employers looking to refuse a request should also give reasonable notice equalling the number of days that are due to be taken, plus one day. So, for the above example, the employer would also need to reject the request above 11 days before it was received.

If an employer wants to force the employee to take holiday at a set time (e.g. a Christmas shutdown), they must give notice equivalent to twice the length of time of the holiday requested. Employers usually solve this problem by specifying the dates of any usual holiday periods in the contract.

You’re obviously able to waive these notice periods for requests should you wish, or even extend them if you want. For example, many employment contracts will state that any notice is subject to management approval.

In a busy or more complex business period, such as the financial year end at an accountancy firm, it would be smart for employers to specify longer notice periods in order to properly organise handovers and cover. Again, any changes to your holiday policy need to be clearly communicated to staff.

Setting Your Holiday Year

Your employee’s leave year will start from the first day of their employment, so make sure to include the date from which your holiday year runs in your employment contracts. It’s usually January 1 to December 31, but some companies choose to align it with their financial year or tax year.

We advise that businesses avoid having leave year end during the busiest working period. People tend to use up left over leave during this time to avoid losing it.

You can’t stop people from taking their holiday entitlement during the year, but you are able to control how people take their holiday to ensure that they are on leave at sensible times.

Legally, however, you CANNOT reduce the amount of holiday you offer below the statutory level, even if the staff member agrees to it.

Resignation and Holidays

Sometimes employees leave without having taken all the holiday they are entitled to, in which case you will need to provide a ‘payment in lieu’ to cover the untaken days.

For full-time workers, the amount owed is based on how much of the year they have worked.

Example: someone who has worked 13 weeks of a year should have taken five days of statutory holiday. As a result, they will need to be paid in lieu a total of one week’s pay.

Conversely, if the contract is terminated and someone has used more holiday than they should, the excess holiday can be deducted from their final pay packet – provided this is set out in the employment contract.

Dismissal and Holidays

If an employee is sacked for misconduct or gross misconduct – they will still be entitled to holiday pay for any leave that was not taken (payment in lieu).

Employers may wish to compel dismissed employees to use untaken holiday entitlement during their notice period, as long as there is sufficient notice given.

If the staff member’s leaving was caused by any disagreement or grievance then it can also help to keep them away from the office at what could be a sensitive time.

What if an employee leaves without working their notice period?

If someone leaves before their notice period ends, the employer still has to pay them for the time that they’ve worked, including any money owed for untaken holiday.

However, stopping showing up to work, without agreeing it with an employer first, is a breach of contract. The individual could have a court claim made against them if the employer incurs extra costs (eg. having to find a short-term replacement hire).

Recording Tax and NI for Holiday Pay

In many cases, you do not need to change your usual procedures to manage your PAYE responsibilities for employees taking holiday.

However, if you use certain holiday pay schemes, there may be different steps to follow. Make sure you check with HMRC in the case of any special circumstances as many alternate pay schemes have now been ruled unlawful.

This is most crucial if you’re still using a potentially non-compliant way of calculating holiday pay, for example “rolled up holiday pay” (when holiday pay is added to a person’s salary).

“Rolled up holiday pay” is now only acceptable in the case of zero hours workers, who are paid their accrued holiday at the end of each assignment. This is because, by the nature of their contract, the worker does not know if they will work the next week, so they can’t ‘book’ holiday time off.

Common Employee Questions on Holiday Entitlement

Vacation time is a very big incentive for staff, which means that questions about holidays are no doubt something that most employers will deal with on a regular basis. Here are some of the most common Q&As:

‘Holiday Buy Back’ – can I sell my annual leave?

Yes, if you have already taken 28 days of leave.

Employers are not legally allowed to pay employees in place of holiday entitlement. Even if the employee agrees it, this is a breach of employment law – except in circumstances where the employee’s contract has been terminated.

Choosing not to comply with this law will land managers in hot water. Employers could find themselves in court or an employment tribunal – both of which come with expensive legal fees.

However, if an employer offers any contractual holiday above the statutory minimum of 28 days, they are well within their rights to buy the surplus days back – as long as the employee agrees.

This is to ensure that staff have been able to take the necessary amount of rest and relaxation time, and satisfies those workers who find themselves with days left over at the end of the leave year.

Practical considerations for holiday buy back

Paying an employee to stay in work, rather than go on holiday, has obvious benefits to organisations.

This approach will reduce absenteeism and avoid the inevitable drop in productivity that occurs when a team member takes a work break. It will also give staff more control over their annual leave decisions.

Still, there are a few potential risks that come with instilling a holiday buy back scheme in a company. Statutory holiday entitlement is there for a reason – not taking holiday time could be detrimental to an employee’s health and wellbeing.

With that in mind, here are some top tips for businesses for holiday buy back:

  • Confirm that the employee is 100% sure of their decision and that they are not making the request due to feeling overwhelmed with their workload.
  • Make sure the employee is aware of other options available to them – ie. taking their leave later in the year.
  • Do not allow employees to sell holiday time unless they have already taken their statutory 28 days of leave, otherwise the business could be in breach of employee law.
  • Design an official holiday exchange policy. This will ensure a transparent process that’s consistent between managers.

‘Holiday Exchange’ – can I buy more holiday?

Some organisations also allow staff to buy more holiday through a salary sacrifice scheme. In most cases, this occurs when the employee has special events coming up, such as a wedding, a holiday of a lifetime or is moving house.

Whether or not a business offers this option should be clearly outlined in its employee handbook.

Can my employer force me to take annual leave?

As an employer, you are not allowed to block employees from using their annual leave. However, you do have some say over when a staff member can go on holiday. You can:

  • Decide how much holiday can be taken in one batch
  • Decide to make employees take holiday at certain times (with enough notice)
  • Decide to refuse holiday at certain times, for example during busy trading periods

🚨 Holidays should be taken for rest and relaxation. Employers cannot force a sick worker to take leave. This also applies to cases of poor mental health, which should be marked down as a sick day rather than vacation time.

Technically speaking, then, a manager could force their employees to use their entire statutory entitlement. But this is definitely not advisable.

Repeatedly compelling workers to take time off will appear untrusting brew resentment amongst the workforce. Blocking someone from taking their annual leave when they wish will make them feel controlled – perhaps even bullied.

Line managers will also be put in the awkward position of having to refuse leave, which would jeopardise working relationships.

While it’s acceptable to give some directions on taking time off, companies should allow for some freedom of movement. Doing so will foster an organisational culture where employees feel valued and trusted to balance their own work-life commitments.

Can you be sacked for taking holiday?

Employers should not treat staff members unfairly or dismiss them for taking time off work. They have a legal right to take up to 28 days holiday in the UK.

Potentially, if the employee has gone on annual leave without giving enough notice (double the amount of time being requested), then there might be a need for disciplinary action to be taken – but this is certainly not a fireable offence.

Employment Law on Bank Holidays

You may not believe it, but there is no statutory right to time off on bank holidays. However, most employers who aren’t in the service industry close on bank holidays and deduct the bank holidays from the statutory holiday allowance.

With the above in mind, it is therefore sensible to include the requirement to work on bank holidays in your employment contracts if it is something that you think you will need.

Using an HR company can help you to stay compliant with employment law – see our guide to the top HR consulting firms for more information.

Flexible Bank Holidays

One employee benefit and perk that has become popular with employers in recent years is the flexible bank holiday. The policy states that staff members can ‘bank’ UK public holidays to use at a more convenient time, rather than being forced to take a day off.

Read more about how flexible bank holidays work in our full guide for employers.

Additional Leave Entitlements

As a quick refresher, employees are entitled to a statutory minimum of 5.6 weeks’ annual leave per year (that’s 28 days for full-time employees, pro-rata for part-time employees).

Under normal circumstances, a team member must accrue this time in work. But those on other types of leave – namely sick, maternity, paternity, or adoption leave – can build up their holiday pot whilst they are away.

Example: if a woman is on maternity leave for 32 out of 52 weeks in the year, she will still accrue her full 28 days’ worth of holiday entitlement by the end of the leave period.

Similarly, if an individual on parental leave is unable to take their statutory leave, the employer is required to carry this over for them into the following leave year. Those on sick leave must be permitted at least 20 days to carry over, while those on parental leave get the full 28 days.

Depending on the amount carried over, this could have tax implications for the year ahead, so it’s best to seek out advice from a HR expert on whether financial measures might need to be taken.

🚨 Employers should not refuse annual leave because an individual is on parental or sick leave, as that would count as employee discrimination.

Get Employment Law Support

Employment law and employment processes can be difficult to manage for smaller companies. Firms without a dedicated HR department should consider outsourcing for external support.

We work with a number of trusted HR partners, who can offer guidance for your business. Simply complete our quick and easy form to get quotes today from the top providers.

HR outsourcing will ensure you stay clear of all the risks listed above, and can get recommendations on best practice for implementing potentially thorny policies like ‘use it or lose it’.

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Written by:
Helena Young
Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.
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