When an employee hands in their notice, or is dismissed or made redundant, one line on the final payslip causes more disputes than almost any other: payment for holiday accrued but not taken. At TimeClock 365 we see the same pattern. The leave balance in a spreadsheet does not match payroll, the contract's day-rate formula is out of date, or nobody is sure whether to claw back leave taken in advance. This guide covers how UK law treats untaken holiday on termination, how to calculate it, and where employers commonly underpay.
The legal basis: regulation 14 of the Working Time Regulations
Workers in Great Britain are entitled to 5.6 weeks' statutory paid annual leave per year (28 days for a five-day week, capped at 28 days). During employment, statutory leave must be taken, not swapped for cash. Termination is the exception. Under regulation 14 of the Working Time Regulations 1998, when employment ends part-way through a leave year, the worker must be paid in lieu of statutory leave that has accrued but not been taken.
The reason for leaving makes no difference. Resignation, dismissal (including for gross misconduct), redundancy and the end of a fixed-term contract all trigger the same right for statutory leave. Any contractual leave above the statutory minimum is governed by the contract, which can lawfully set different rules for that extra portion.
The statutory formula: (A × B) − C
Unless a "relevant agreement" (a written contract term, collective agreement or workforce agreement) provides otherwise, regulation 14 uses this formula:
- A = the worker's annual statutory leave entitlement
- B = the proportion of the leave year that has passed at the termination date
- C = the leave already taken in that leave year
Worked example
Sam works five days a week with 28 days' statutory entitlement. The leave year runs January to December. Sam's employment ends on 30 June, which is day 181 of 365, and Sam has taken 8 days.
- Accrued: 28 × 181/365 = 13.88 days
- Owed: 13.88 − 8 = 5.88 days
The day-rate trap: why 1/365th of salary is risky
Many older contracts calculate a "day's pay" as annual salary ÷ 365 (or ÷ 260). In Connor v Chief Constable of South Yorkshire Police, the Employment Appeal Tribunal held that a relevant agreement can be more generous than the statutory scheme but cannot pay less. A 1/365th day rate pays less, because it spreads pay across weekends and other non-working days. The amount at stake in that case was small, but the principle applies to every leaver.
The safer approach is to base the day rate on a week's pay divided by the number of days normally worked in a week. For a salaried full-time employee, that is salary ÷ 52 ÷ 5. Where pay includes regular overtime, commission or allowances, check how these feed into holiday pay. The first four weeks of statutory leave must reflect "normal remuneration", and many employers pay leave in lieu on termination at the same rate they use for leave taken during employment.
Irregular-hours and part-year workers
For leave years starting on or after 1 April 2024, irregular-hours and part-year workers accrue holiday at 12.07% of hours actually worked in each pay period. On termination, you pay for accrued hours not yet taken, valued under the holiday pay rules (typically using the 52-week average).
If you have been lawfully using rolled-up holiday pay (an extra 12.07% shown separately on each payslip), holiday pay for those periods has already been made, so there is nothing further to pay for them on termination. Make sure the rolled-up element was itemised on every payslip. If it was not, it may not count.
Carried-over leave counts too
Leave carried into the current year must be included in the final calculation. That includes leave a worker could not take because of sickness or family-related leave, and leave carried over under a contractual policy. Long-term sick leavers and employees returning from maternity leave who then resign are the cases most often underpaid, because their balances span more than one leave year.
When the leaver has taken too much leave
If C is larger than A × B, the worker has taken more leave than they accrued. Employers often assume they can deduct the excess from final pay. They can only do this if both of the following apply:
- a relevant agreement provides for compensation in this situation (regulation 14(4)), and
- the deduction is authorised in writing in the contract, or the worker gave prior written consent, as required by section 13 of the Employment Rights Act 1996.
Without a clear written clause, a deduction can be an unlawful deduction from wages.
Using the notice period instead of paying out
You do not always have to pay out the balance. Under regulation 15 you can require the worker to take accrued leave during their notice period, provided you give notice at least twice as long as the leave you want them to take. Record those days as leave so the final calculation reflects them.
Why accurate records decide these disputes
Final-pay holiday claims are usually decided on the records: the entitlement, the leave taken, any carry-over and how the day rate was worked out. The Employment Rights Act 2025 requires employers to keep holiday records for six years. Since 1 October 2026, most tribunal claims also have a six-month time limit instead of three months, so gaps in your records stay exposed for longer.
TimeClock 365 keeps leave requests, approvals and balances in one place through PTO and leave management. For irregular-hours staff, accrual is calculated from real clock-in data, so the leaver's balance on the last day matches the hours they actually worked. The HR compliance tools keep a timestamped audit trail you can export when payroll, an auditor or a tribunal asks how a figure was reached.
Frequently asked questions
Do employers have to pay for unused holiday when an employee leaves in the UK?
Yes. Under regulation 14 of the Working Time Regulations 1998, when employment ends part-way through a leave year, the worker must be paid in lieu of any statutory annual leave they have accrued but not taken. This applies whether the worker resigns, is dismissed or is made redundant. Payment in lieu is only lawful on termination, not as a substitute for leave during employment.
How is payment in lieu of untaken holiday calculated?
Unless a relevant agreement gives a more generous method, the statutory formula is (A × B) − C, where A is the annual leave entitlement, B is the proportion of the leave year that has passed at the termination date and C is the leave already taken. For example, a full-time worker with 28 days who leaves halfway through the leave year having taken 8 days is owed about 6 days of pay.
Can a contract say holiday pay on termination is calculated at 1/365th of salary?
A contract can set its own method, but it cannot pay less than the Working Time Regulations require. In Connor v Chief Constable of South Yorkshire Police, the Employment Appeal Tribunal held that a 1/365th-of-salary day rate was unlawful where it produced less than the statutory entitlement. A day rate based on a week's pay divided by working days per week is the safer approach.
Can an employer recover holiday pay if a leaver has taken more leave than they accrued?
Only if a relevant agreement, such as a written contract term or workforce agreement, provides for it. Making a deduction from final pay also requires written contractual authority or prior written consent under the Employment Rights Act 1996. Without both, the employer generally cannot claw back the excess.
How is untaken holiday paid on termination for irregular-hours workers?
For leave years starting on or after 1 April 2024, irregular-hours and part-year workers accrue holiday at 12.07% of hours worked in each pay period. On termination, the employer pays for accrued hours not yet taken. If the employer has lawfully used rolled-up holiday pay, adding 12.07% to each payslip, no further holiday payment is due for those periods.
Is payment in lieu of untaken holiday taxable?
Yes. Payment in lieu of accrued holiday on termination is treated as earnings. It goes through payroll with Income Tax and National Insurance deducted in the normal way, usually on the final payslip, and it does not fall within any tax-free termination allowance.
This article is general information, not legal advice. For guidance specific to your business, contact ACAS or a qualified UK employment solicitor.