How to Calculate Holiday Pay When Overtime Is Involved

Calculating holiday pay can feel straightforward when someone works fixed hours, but things get more complex when overtime is involved. Since April 2020, the Government has required employers to use a 52-week reference period when working out holiday pay for employees with variable pay. This rule came in as part of the Good Work Plan and ensures a fairer approach for people whose hours and earnings fluctuate.

What Does This Mean?

• If an employee has worked for you more than 52 weeks, holiday pay should be based on their average weekly earnings over the previous 52 paid weeks.

• If they’ve been with you less than a year, simply use the full length of employment as the reference period.

• Only weeks where the employee actually received pay count (unpaid leave weeks are skipped, and you go further back in time to make up the full 52 weeks if needed).

Example Calculation

Let’s look at an example.

• An employee is contracted to 35 hours per week at £12 per hour.

• They regularly do 6 hours of overtime each week, paid at £18 per hour.

Step 1 – Contracted pay35 hours × £12 = £420 per week

Step 2 – Overtime pay6 hours × £18 = £108 per week

Step 3 – Total weekly earnings£420 + £108 = £528 per week

Step 4 – Daily holiday rate£528 ÷ 5 days = £105.60 per day

So, if this employee takes a day of annual leave, their holiday pay should be £105.60.

Key Things to Remember

• The 52-week average matters most where overtime varies from week to week. If overtime is the same every week (like in our example), the calculation is simpler.

• The rule applies to statutory holiday entitlement (5.6 weeks per year). If you offer additional contractual leave, you could choose not to include overtime in the extra leave pay — but many employers prefer to keep things consistent to avoid confusion.

• Keeping accurate records of hours worked and pay received is essential for compliance.

What Employers Should Do

✅ Review how you’re currently calculating holiday pay.

✅ Make sure overtime and variable pay are included where required.

✅ Update payroll processes to use the 52-week averaging method.

✅ Communicate clearly with staff so they understand how their holiday pay is worked out.