Only Upon Termination
Under UK employment law, statutory annual leave is designed for health, rest, and recuperation. In accordance with Regulation 13(9)(b) of the Working Time Regulations 1998 (WTR 1998), statutory annual leave (5.6 weeks / 28 days for a full-time worker) cannot be replaced by a financial payment while the employment relationship continues.
Only where employment is terminated and the worker has accrued but untaken statutory holiday entitlement does Regulation 14 WTR 1998 grant an express statutory right to a payment in lieu of untaken leave (payment in lieu of holiday).
Calculation
The calculation of payment in lieu of untaken annual leave is governed by Regulation 14 WTR 1998 and Sections 221–224 of the Employment Rights Act 1996 (ERA 1996):
- Accrual formula: Regulation 14 sets out a statutory formula:
(A × B) - C, where A is the worker's statutory annual leave entitlement, B is the proportion of the leave year elapsed up to the termination date, and C is the amount of leave already taken in that leave year (unless a relevant agreement or contract specifies a lawful alternative formula). - Reference period & holiday pay: For workers with variable hours or pay, holiday pay calculations must reflect average earnings over a 52-week reference period (ignoring weeks with no pay, looking back up to a maximum of 104 weeks). Calculations must include regular overtime, recurring commission, and compulsory allowances that form part of normal remuneration.
- Daily / hourly rate: The resulting weekly average is broken down to a daily or hourly rate and multiplied by the outstanding accrued holiday balance.
Legal Nature and Enforceability
A statutory claim for payment in lieu under Regulation 14 WTR 1998 arises on the effective date of termination (EDT) and constitutes a debt / claim for unlawful deduction from wages under Section 13 of the Employment Rights Act 1996 or breach of contract.
- Limitation periods: A claim before an Employment Tribunal must normally be lodged within three months (less one day) from the date payment was due, subject to mandatory ACAS Early Conciliation.
- Contractual enhanced holiday: Any contractual holiday entitlement exceeding the statutory minimum of 5.6 weeks is governed strictly by the terms of the employment contract, which may specify forfeiture rules upon resignation or dismissal.
Tax and National Insurance Contributions (PAYE)
Payment in lieu of accrued untaken annual leave is treated as standard earnings from employment:
- It is subject to statutory deductions for Income Tax via PAYE (Pay As You Earn) and Class 1 National Insurance Contributions (NICs).
- It must be processed through the final payroll run (FPS via HMRC Real Time Information) and does not qualify for the £30,000 tax-free exemption applicable to certain genuine ex-gratia redundancy severance payments.
Garden Leave and Notice Periods
Where an employee is placed on garden leave during their contractual or statutory notice period under Section 86 ERA 1996:
- The employer may require the employee to take their accrued statutory annual leave during the notice / garden leave period, provided the employer gives statutory notice under Regulation 15 WTR 1998 (at least twice as many days in advance as the duration of leave to be taken), unless the employment contract provides otherwise.
- If leave is lawfully required and taken during garden leave, the outstanding accrued entitlement at the termination date is reduced accordingly, reducing or eliminating the requirement for a final payment in lieu.
- Updated on