Holiday pay and tax

Holiday pay goes through PAYE like the rest of your wages. Income Tax, National Insurance, any student loan deduction and usually pension contributions come off it, and there is no extra tax and no tax-free element. When it looks over-taxed, the cause is almost always timing: a large holiday payment landing in a single pay period, or arriving after you have left.

Paid leave during your job

For most salaried public sector staff, holiday pay is invisible. A teacher, nurse or council officer on a monthly salary keeps getting the same monthly pay while on leave, taxed under the normal tax code, and nothing separate shows on the payslip.

The legal minimum is 5.6 weeks a year, which is 28 days for someone working five days a week. Many public sector contracts give more. NHS Agenda for Change staff get 27 days rising to 33 days with service, plus 8 public holidays, and local government staff get at least 33 days in total including public holidays. The holiday entitlement guide has the detail.

Rolled-up holiday pay

Workers on irregular hours or part of the year, such as bank staff, supply staff and some casual school workers, can have holiday pay added to each payment instead of being paid when they take leave. For leave years starting from 1 April 2024, holiday accrues at 12.07 per cent of hours worked, and rolled-up pay is allowed for these workers.

The rolled-up amount appears as its own line on the payslip and is taxed with that period’s pay. Because it comes with every payment, it causes no tax spikes. Look for the line. If it is missing, your employer may be paying holiday separately, or not at all. Zero-hours contracts covers rights for irregular hours work.

Untaken holiday when you leave

On leaving a job you are entitled to be paid for statutory holiday you have built up but not taken. Contracts often cover extra contractual leave too, or let the employer recover pay for leave taken in advance.

Payment for untaken holiday counts as earnings and is taxed like salary. It is added to your final pay, with tax and NI deducted through payroll. In a redundancy it does not count towards the £30,000 that can be tax-free; see is redundancy pay taxed?.

Say you leave a band 4 NHS post on £28,392 at the end of the month with five days of leave untaken. A day’s pay on that salary is roughly a 261st of the year, about £109, so the payment is about £544. Added to the final month’s pay, it is taxed at 20 per cent with NI at 8 per cent as usual, assuming your code is 1257L.

When the tax looks too high

Two situations cause most complaints.

The first is a final payment made after your P45 has been issued. Payroll has to tax any payment after the P45 using the 0T code on a non-cumulative basis. You get no Personal Allowance and each pound is taxed from the first, so a holiday payment of a few hundred pounds can lose 20 per cent to tax even if you earn little that year.

The second is a large payment in one period on an emergency or non-cumulative code. On a W1, M1 or X code the allowance for that period is fixed, and any extra pay is taxed in full.

In neither case is the money lost for good. Start another job in the same tax year and hand over the P45, and the new payroll uses cumulative tax and usually refunds the overpayment. If you do not work again that tax year, you can claim the overpaid tax back from HMRC. Claiming a tax refund explains how.

Holiday pay in advance

Some employers pay holiday in advance, for example a week’s pay before you go away. The same tax rules apply, but pay for the following period will be smaller. Under a cumulative code the two periods are added together, so total tax over the year stays the same.

National Insurance is worked out per period and can come out slightly different when two weeks’ pay falls in one week. For most people the difference is small.

If something has gone wrong

Holiday pay that is missing, short or wrongly calculated is a pay problem, not a tax one. Raise it with payroll or HR first. ACAS gives free advice on holiday pay, and a trade union can help members raise a grievance. If the issue is the tax taken from a correct payment, contact HMRC. The details on your P45 or final payslip will help them check which code was used.