How do I calculate accrued holiday when an employee leaves?

The basic rule

Under the Working Time Regulations 1998 and the Employment Rights Act 1996, when an employee leaves they must be paid for any statutory holiday they've accrued but not taken. There is no exception. It applies whether they resign, are dismissed, made redundant, or reach the end of a fixed-term contract.

The same regulations also let an employer deduct overtaken holiday — but only if the contract permits it, and only against statutory leave. We'll come to that.

The standard formula

To work out accrued holiday on a leave date:

(annual entitlement ÷ days in the leave year) × days worked in the leave year − days already taken

Or equivalently, in months:

(annual entitlement ÷ 12) × completed months in the leave year − days already taken

A worker entitled to 28 days a year, leaving on 30 June with a 1 January leave year, having taken 5 days:

(28 ÷ 12) × 6 = 14 days accrued 14 − 5 = 9 days to pay out

For workers with a non-standard year (e.g. anniversary-based or pro-rata for joiners) the same shape works — adjust the entitlement and the elapsed period accordingly.

The pay rate for the payout

For full-time salaried workers, calculate a daily rate from annual salary:

annual salary ÷ working days per year (typically 260)

Multiply by the number of unused holiday days. This goes into the final payslip with normal PAYE and NIC treatment — it is not a tax-free termination payment.

For variable-hours or variable-pay workers, use the 52-week reference period: average weekly pay across the 52 most recent paid weeks, then derive a daily rate from that.

Overtaken holiday — the deduction trap

Many employees, particularly leavers in the first half of a leave year, will have taken more holiday than they've accrued by their leaving date. The contract usually allows the employer to deduct the overpayment from final pay.

Two important conditions:

1. The contract must say so. Without an express clause, the deduction is unlawful even if both sides verbally agree. Section 14(1) of the Employment Rights Act 1996 permits deductions for "an overpayment of wages," but the safe and clean route is an explicit clause.
2. The deduction can only recover the value paid for the overtaken leave — typically the number of overtaken days × the worker's daily rate. You cannot use it to reclaim other costs.

A typical contract clause looks like:

On termination, if the employee has taken more annual leave than has accrued at the leaving date, the employer may deduct the value of the excess from any final payment due, including salary, expenses, or notice pay.

Without this clause, you simply absorb the cost. Adding the clause to existing employees needs consent (or a contractual right to vary) — easier to include from day one.

Notice and holiday — three options

When an employee resigns or is given notice, employers usually pick one of three approaches:

• Pay it out — let them leave at the end of notice and pay accrued holiday in the final payslip
• Take it during notice — require the worker to use up holiday inside the notice period (using the standard double-notice rule: two weeks' notice for one week of leave)
• Combine both — clear the bulk of the balance during notice and pay any remainder

Taking holiday during notice is usually cheaper and tidier — it avoids carrying a final-payslip surprise and reduces the leaver's gardening leave window. The contract should make clear that this is at the employer's discretion.

Special cases

Termination for gross misconduct

The leaver still gets paid for accrued statutory holiday. Pay above the statutory minimum can be withheld if the contract permits.

Death in service

The estate is entitled to pay for accrued holiday up to the date of death. Treat as a normal final payslip with no PAYE / NIC if the employer has a registered death-in-service scheme; otherwise standard rules apply.

Long-term sickness ending in dismissal

Holiday accrues throughout sickness absence. So someone off sick for 18 months and then dismissed on capability grounds is entitled to paid leave covering the entire 18-month period (less anything already paid out). This is often a five-figure sum.

TUPE transfers

On a TUPE transfer, leave entitlement transfers with the employee — the new employer inherits both the days accrued and the obligation to pay out unused leave on any future termination.

What you cannot do

• Pay statutory holiday in lieu while still employed. Statutory leave must actually be taken — only the leave year-end can be paid out, and only for the leaver. (Holiday above the statutory minimum can be paid in lieu if the contract allows.)
• Roll up holiday pay into hourly rate for ongoing employment. Rolled-up holiday pay was found unlawful by the European Court of Justice in 2006. The exception: from 1 April 2024, rolled-up holiday pay was reinstated specifically for irregular-hours and part-year workers under the 2023 amendment regulations.
• Refuse the payout. It's a statutory right, not a discretionary benefit.

Putting it into practice

A clean leaver process should generate, automatically:

1. The leaver's accrued days as at the leaving date
2. The days already taken in the leave year
3. The balance — either to pay out or to deduct
4. The pay calculation (daily rate × days)
5. The payslip line showing the gross amount

Most disputes around accrued-holiday payouts come from manual calculations and inconsistent leave-year handling. The arithmetic is mechanical — automate it.