Annual leave: How to calculate it and how to create an annual leave policy

The coronavirus pandemic has undoubtedly impacted how annual leave works for employers and employees who have been furloughed. Read the government guidelines regarding holiday whilst on furlough here.

Holidays are the highlight of the year for many employees, giving them a chance to relax and recharge away from their work responsibilities.

Yet, despite the obvious benefits, research by Totaljobs shows that a third of Brits don’t fully understand their annual leave and are failing to take their yearly entitlement as a result.

In this guide, we’re going to clear up some of the confusion around leave for both employers and employees.

As an employee, you will learn what annual leave is and how much leave you are entitled to per holiday year, based on your contract type and/or hours worked.

For employers, we’ll discuss the rules regarding how much leave you are required to grant, as well as how and when you can offer leave time off. We’ll also outline how to create a comprehensive policy that makes it easier to manage holidays.

Top Tip: Before we dive into the rules and regulations surrounding annual leave, it’s important to understand the best practices regarding employing someone for the first time. This includes deciding whether to hire full-time staff or freelancers, complying with local legislation, attracting the right kind of talent and creating an effective onboarding process. To learn more, read our guide to how to employ someone (for the first time) 🙌.

Table of contents

1. What is statutory annual leave?
2. How much annual leave are employees entitled to?
3. For employees: How to calculate your annual leave entitlement
4. How much are employees paid for annual leave?
5. How annual leave is accrued
6. Carrying over entitled statutory annual leave
7. When can employees take their annual leave?
8. For employers: Offering employees more than the minimum entitlement
9. How to create an annual leave policy
10. Expert insights
11. Wrapping up

What is statutory annual leave?

Annual leave is paid time off work that an employee can take for whatever reason they choose.

Workers are legally entitled to be paid their normal wages whilst on leave. There are different ways to calculate what constitutes a normal wage, which we will discuss in detail below.

The right to annual leave begins on the first day an employee starts work. Workers are granted varying amounts of annual leave depending on their contract type or how many hours they work.

The most common type, full-time workers are legally entitled to at least 5.6 weeks, or 28 days, per year. Employers can choose if they want to include bank holidays in the 28 days of entitled leave or grant employees the full 28 days in addition to bank holidays.

The number of actual days of statutory leave an employee gets each year depends on:

• How many hours they work
• The type of worker they are (e.g. full-time, part-time employee or agency worker)
• Their Contract of Employment

Top Tip: While this is the minimum amount of annual leave employers must grant their employees, they can choose to offer more than the government requires. We’ll discuss this in detail below, as well as show you some examples of custom annual leave policies and best practices on how to implement them 🌟.

How much annual leave are employees entitled to?

The amount of annual leave employees get varies based on their type of contract:

• Full-time workers. If an employee is contracted as a full-time employee and is expected to work 35 hours or more a week, they’re entitled to a minimum of 5.6 weeks (28 days) of annual leave each year.
• Part-time workers. For part-time contract workers, or workers that work less than 35 hours a week, annual leave entitlement is based on a pro-rata proportion of the 5.6 weeks statutory minimum. For example, someone who works three days a week is entitled to three-fifths of the 5.6 weeks leave, which works out to 16.8 days.
• Workers on irregular hours. For employees such as zero-hour contract workers where hours worked are inconsistent, leave is again based on a pro-rata proportion of the 5.6 weeks statutory minimum, which is the equivalent of 12.07% of the hours worked. This works out at 7.2 minutes of leave for every hour worked.
• Shift workers. Where employees work regular shifts, their entitlement is based on 5.6 weeks of leave multiplied by the average number of shifts worked over a 12-week period.

Employers and employees alike can calculate how much time off they are entitled to give or take per year by using the holiday entitlement calculator.

Top Tip: If you are classed as self-employed, or a freelancer, you are not eligible to any annual leave time off by law 📅.

What about public and bank holidays?

As mentioned above, it is up to the employer to decide if they want to consider public or bank holidays as part of, or separate from, the annual leave allowance.

There is no law in place forcing employers to choose one way or another. If they do choose to include these days in their employees allotted annual leave it will reduce the number of days an employee is free to use.

For example, based on the eight bank holidays a year in England, a full-time worker with 28 days’ annual leave would have 20 additional days free to use throughout the year.

If, as an employer, you decide to include bank holidays in your allowance, you should make this clear in the terms of your employment contracts to avoid any confusion.

Top Tip: Setting up an employment contract may seem like a simple undertaking, but when it comes to details such as bank holidays and annual leave, it’s imperative that you’re transparent about exactly what allowances you are giving your employees to avoid any confusion or potential grievances. If you’re unsure how to proceed, or simply want to consult with an expert to ensure what you’ve created is above board, you may want to consider hiring an accountant to help you out. To learn more about where to find a qualified accountant online, read our guide to how to get an online accountant for your small business 🔑.

For employees: How to calculate your annual leave entitlement

How many days of holiday you’re entitled to each year is based on the magic number of 5.6 (the number of weeks of annual leave all employees are entitled to) multiplied by the hours you work.

Here are some examples of how to calculate your annual leave time off based on contract type:

If you work full-time:

Multiply the number of days worked a week by 5.6.

So if you work five days a week:

5 x 5.6 = 28 days of annual leave.

If you work part-time:

Again, multiply the days worked a week by 5.6.

So, if you work three days a week:

3 x 5.6 = 16.8 days of annual leave.

If you work irregular hours:

Work out your entitlement as you go by multiplying each hour worked by 12.07%.

12.07% is worked out by dividing the 5.6 weeks of annual leave entitlement by 46.4 weeks (52 weeks of the year minus 5.6 weeks), then multiplying by 100:

(5.6 / 46.4) x 100 = 12.07

So, if you worked 12 hours in a week:

12 x 12.07% = 1.45 hours of annual leave.

If you work shifts:

Take your average shifts pattern over 12 weeks and multiply it by 5.6.

So if you work four days of 12-hour shifts with four days off in between, your average would be 3.5 shifts a week.

3.5 x 5.6 = 19.6 12-hour shifts of leave.

These calculations are based on your statutory entitlement and only apply if your employer does not offer more annual leave than the minimum legal requirement.

For help working out the calculations, GOV.UK has an entitlement calculator that works out holidays for all of the working patterns covered above.

How much are employees paid for annual leave?

Employees on annual leave are paid the exact same amount as they get while working.

For example, if you earn £400 a week (£10 an hour over five days of 8 hours) and take four days’ annual leave, you’ll receive £320 in holiday pay before tax and National Insurance.

While it’s easy to calculate how much pay you receive at work if you are engaged in a full-time contract, it’s more difficult in other situations:

• For employees who work set hours every week, with full-time or part-time contracts, pay is calculated based on their usual rate.
• For full-time or part-time employees who do not have fixed or regular hours, pay is calculated based on the average number of hours or shifts worked, at the average hourly rate in the previous 12 weeks. If an employee wasn’t paid for a week during those 12 weeks, an earlier week should be used to calculate pay instead.
• For employees who work casual hours (e.g. zero-hour contract workers), pay is calculated based on the average pay received in the previous 12 weeks that were worked.

Factoring in overtime, bonuses and commissions

According to the EU Working Time Directive, if an employee regularly gets paid overtime, bonuses or commission, these extra payments must be included in at least four weeks’ annual leave.

Why not the full 5.6 weeks?

Because the Working Time Directive is based on four weeks’ holiday. There is, however, nothing stopping employers from extending extra payments across the entire leave entitlement.

What is rolled-up holiday pay and can I offer it?

Rolled-up holiday pay involves adding holiday pay to an employee’s salary, then not paying them while they are on leave.

Employers used to be allowed to include this in an employee’s contract, but this is no longer the case.

Holiday pay now can only be paid when annual leave is taken, so employees should always be encouraged to use up their entitlement.

How is annual leave accrued?

Annual leave entitlement starts accruing from the first day an employee starts a new job. This includes any probationary period, even if they don’t pass it.

How leave is accrued will depend on what (if any) system is in place.

For example, during the first year of employment, employers might give one-twelfth of the full leave entitlement for every month worked. So if an employee starts mid-way through the year, they would only receive a chunk of the 5.6 weeks’ leave.

Alternatively, leave can be calculated on a pro-rata basis, with no accrual needed. This simply means that rather than needing to work to earn their days, the time off is simply awarded in full at the start of employment and can be used anytime thereafter.

It’s up to the employer to choose which strategy to enforce.

Do employees accrue annual leave when they are off work?

Employees continue to accrue statutory annual leave when they are off work due to:

• Sickness 
• Maternity leave
• Paternity leave
• Shared parental leave
• Adoption leave

Leave is also accrued when a worker is employed on a zero-hour contract and not working. This leave would apply to those who work casual or inconsistent hours and may not be given any current projects to work on. In this case, similar to part-time workers, leave is based on a pro-rata proportion of the 5.6 weeks statutory minimum, which is the equivalent of 12.07% of the hours worked. This works out to 7.2 minutes of leave for every hour worked, and the exact amount of accrued leave can be calculated based on the average pay received in the previous 12 weeks that were worked.

For individuals such as agency workers that work on separate assignments, annual leave is accrued only while they’re working. The difference between agency workers and zero-hour contract workers is that zero-hour contracts are umbrella contracts, meaning that workers are still considered an employee even when they are not working. Agency workers, or temporary workers, however, work on separate and severable assignments, meaning they are on a restricted contract with the employer and therefore can only accrue leave while actually working.

Can employees carry over entitled statutory annual leave?

According to the Working Time Regulations (WTR), employees must use four weeks of their holidays within a one year period. If they fail to use them, they’ll lose those leave days at the end of the year.

Their remaining 1.6 weeks, or a maximum of 8 days, may be carried over to the following year, subject to the employee-employer agreement The employer has the right to not grant a maximum of 8 days and may choose to give less. There is no strict law stating what the employer must do with the remaining 1.6 weeks.

Why aren’t the 5.6 weeks of entitled leave treated the same?

The right to paid holiday in the UK is actually a bit more nuanced than it appears. This is because it’s a combination of both EU and UK laws.

Under EU law, Regulation 13 states that workers must be given 4 weeks’ holiday. The UK law then separately includes an additional 1.6 weeks of holiday, under regulation 13A. Regulation 16 goes on to require that all of this time off is paid.

Because statutory annual leave in the UK is made up of both EU and UK specific laws, they follow different guidelines. Many employers choose not to distinguish any difference between the two laws, and it’s best-practice to state this clearly in the leave policy so there is no confusion. 

Are there any exceptions to how much annual leave is carried over?

Yes, and each exceptional circumstance has different rules.

While not required by law, employers often grant employees an allotted amount of sick leave per year. If the employee is sick for a prolonged period of time they may not have enough time to use their remaining annual leave days when they return to work. Or, the employee may be on long-term certified sick leave and miss the last 4 months of work in their holiday year. (If an employee is on prolonged sick leave, employers cannot force employees to use their annual leave during this time.)

In sick leave scenarios, the employee is eligible to carry over 4 weeks’ of their unused holidays to the following year. The carried over days must be used within 18 months from the end of the year in which they were accrued.

Alternatively, if an employee is off work for maternity, paternity, shared parental or adoption leave, all of their unused holidays can be carried over to the next year.

What happens if a worker leaves their job before taking all of their time off?

In this case, unused leave must be paid on a pro-rata basis. In other words, workers must be paid for their unused days in their final paycheck.

For example, if a full-time contract worker leaves their job having only taken 3.6 of their allotted 5.6 weeks, they must be paid the equivalent of 2 weeks in cash.

So, if the full-time worker gets paid a salary of £45,000 a year, their wage amounts to £187.5 a day. Multiply that by 2 weeks, or 10 days, and we find that the worker is owed £1,875.

Contrastingly, if a worker leaves their job and has taken more time than they’ve been allotted, their overpaid time off will be deducted from their final paycheck.

What about carrying over non-entitled allotted annual leave?

As we will discuss below, employers can offer more time than is minimally required. In this case, it is up to the employer to decide whether or not to allow more than the statutory minimum holiday entitlement to be carried over.

To avoid headaches when it comes to managing holidays, many employers opt for a ‘use it or lose it’ approach to encourage employees to use up their leave entitlement. This is lawful under the Working Time Regulations. 

However, the WTR notes that if the employer has not notified workers that they have remaining days off before the year’s end, then workers should not lose their allotted days off.

If an employer did clearly notify the worker and the worker chose not to use the holidays, then their days will be lost at year’s end.

When can employees take their annual leave?

When planning a holiday, the government recommends that employees give at least double the time of their planned vacation as notice to their employer. For example, if an employee is planning to take 2 weeks off, they should notify their employer 4 weeks before their departure.

However, employers do retain the right to deny a request of leave if they so choose. Employers should outline their annual leave policy in detail in the company handbook and clearly convey this policy to new employees to avoid any misunderstandings.

For example, employers can request that employees in the retail industry do not take a vacation around holiday periods, such as Christmas or New Year’s. These so-called seasonal restrictions ensure that employers aren’t short-staffed on their highest revenue days of the year.

Employers may also place a cap on how many employees from one team can take a vacation at the same time. Mandates like this are put in place to guarantee that productivity and quality of service are not lost due to many team members being absent in tandem.

Finally, employers can place a cap on how much annual leave an employee can take at one time. One company may allow an employee to take the entire 5.6 weeks at once, while another may place a cap at 2 weeks at a time.

What happens if an employer denies an employee’s eligible statutory leave?

If an employer denies requests for leave resulting in an employee unable to reach their yearly statutory minimum, the employer could face heavy penalties.

If wronged, employees have the right to file an employment tribunal claim with the government. The claim must outline the unlawful treatment an employee faced at the hands of their employer.

As each unique situation differs, there is no common outcome for tribunal claims.

For employers: Offering employees more than the minimum entitlement

At some point after you launch your business and begin to scale, you will most likely take on employees. As there are many rules and regulations surrounding this, you will need to thoroughly understand how to employ someone for the first time.

This process includes making procedural decisions, such as how much annual leave entitlement you will be offering to your employees.

While 5.6 weeks is the minimum that employers have to abide by, there’s no upper limit on the amount of annual leave that can be set. 

The marketing firm Visualsoft, for example, take annual leave to a recently popularised extreme by offering unlimited holidays to staff.

Whether this extended policy would be right for you as an employer will depend on resources and demand. Ask yourself:

• Can you afford to offer such a generous annual leave package?
• Is it something your employees would welcome?

According to a story by the BBC, while some companies have found that offering unlimited holidays increased productivity, others said it caused a huge amount of anxiety.

When determining how much statutory annual leave your company should offer, make sure it aligns with your company’s business operations and core values.

Remember, happy employees are more motivated, loyal and tend to perform better than disengaged ones. A great way to keep employees happy is by giving them a competitive annual leave policy that allows them to disengage and avoid burnout.

Top Tip: Another great way to ensure that you are creating a positive workplace culture is to choose a management style that aligns with your business goals. In general, great management is about understanding the value that each of your employees bring to your business and then capitalising on those unique traits. By identifying which management style resonates the most with both your personality and the vision for your business, you can inspire your team to consistently perform at their highest level. To learn more about why the right management style matters and how to pick the best one for your business, read our guide to 6 effective management styles to become a stronger leader 🔥.

How to create an annual leave policy

Having an annual leave policy helps you set expectations and avoid any issues or disputes down the road. A good policy lets employees know exactly what they are and aren’t entitled to, including how holidays are granted and when they are allowed to be taken.

At a minimum, an annual leave policy should include:

• Details on entitlement
• When the holiday year starts
• How employees need to book holidays
• Leave restrictions
• How leave is issued
• How much notice should be given
• The rules on carrying over leave
• Your right to refuse or cancel leave
• How leave is calculated at the end of employment

Top Tip: An annual leave policy is only one of several policies you’ll need to create in order to effectively streamline your business operations and keep everybody on the same page. Another key policy that you’ll need to create is an expenses policy, which will help to inform your employees on how to best spend company money appropriately. To learn more about what a company expense policy is and how to ensure yours is effective, read our guide to how to create a company expense policy ✨ .

Let’s look at each of these in more depth.

1. Details on entitlement

It’s a legal requirement to give employees written details on:

• How many days of annual leave they receive
• Whether the entitlement includes bank holidays

Information should also be included on leave entitlement for employees starting mid-way through the year (i.e. whether holidays are accrued or issued on a pro-rata basis).

2. When the holiday year starts

Documenting when your annual leave year starts and ends lets employees know when they can start booking holidays and when they need to use their entitlement by. It is up to you as the employer to decide when the annual leave year starts.

There are pros and cons to every holiday year start date:

• January 1st. This keeps your annual leave in line with the calendar year, making it simple to track. However, it may result in multiple employees needing to use up holidays at the same time toward the end of the year, often around Christmas.
• Financial year. Keeping leave in line with your tax year (typically April 1st to March 31st) can make financial reporting simpler, but may result in employees needing to use up leave during a busy time for the company. 
• From the employee’s start date. This makes it easier to calculate leave during the first year, but results in everyone having a different annual leave year. This may be easy to manage if you have a small staff, but can become a headache as a business grows.

There is no ‘best’ answer here, so base your choice on what’s easiest to manage for your business.

3. How employees need to book holidays

Detail how an employee needs to request leave.

Usually, this involves asking their line manager and filling out a form or making a request using a company HR system.

Make it clear that the employee needs to state the start and end date and that the request will need to be reviewed before being approved.

4. Leave restrictions

Layout any particular days or periods when holidays should or cannot be taken.

For example, if your business shuts down at Easter and Christmas, you may want employees to take holidays over these periods. In which case, you should indicate in your policy the number of days’ leave to be reserved.

On the flip-side, Easter might be a busy time of year where you need your full workforce available. Therefore, details need to be given on the specific dates when holidays aren’t allowed.

5. How leave is issued

There are a handful of obvious time periods throughout the year when holiday requests are popular, such as Christmas, Easter or over the summer and half-terms, for example.

To ensure everyone gets fair treatment in these heavy request periods, consider these tips:

• Let employees choose between popular periods. If Christmas and summer are your most popular times for holiday requests, you can give employees the choice of when to take leave. If someone misses out on leave for a summer holiday, they can be given priority for Christmas.
• Limit the number of consecutive days off. Restricting how many days off an employee can take at once can ensure you’re not left depleted or without a valuable member of the team for long periods.
• Cap the number of team members from one team to take time off in tandem. It’s impractical to allow every member from a certain team to take time off at the same time while you are open for business. Capping the number of team members that can take time off simultaneously ensures that your teams are never fully depleted and that the quality of work does not drastically diminish due to holidays.

6. How much notice should be given

As mentioned earlier, the government recommends that employees give their employers notice in a time frame that is twice as long as the number of days they will take off.

For example, if an employee wants to take a week off, they should give you two weeks’ notice.  

Make it clear that employees need to respect the notice period in order for a holiday to be approved.

7. The rules on carrying over leave

Above, we mentioned the legal minimums for carrying over leave and discussed how the laws vary depending on the scenario, such as unused days being carried over from sick leave vs. maternity, paternity leave, or compassionate leave.

Yet, if you are offering a leave policy that allows for more time off than is minimally required, you should outline how these custom days will be carried over.

Detail your rules around carrying unused leave over from one year to the next including:

• The maximum number of days that can be carried over
• The deadline that carried over leave has to be used by
• How leave is carried over in the event of maternity, paternity, adoption or shared parental leave and sick leave

8. Your right to refuse or cancel annual leave

Refusing a holiday request or cancelling pre-approved leave can result in an employee left feeling disappointed and dejected, so it’s something that should only be done as a last resort and with a clear business reason.

For example, three or four people in a department asking for holidays at the same time may leave you unable to meet demand. Or a tight deadline may require all hands on deck to get a project over the line. In both cases, you may be forced to say no.

Make it clear that you reserve the right to deny or cancel annual leave and detail how much notice the employee will be given.

For both refusals and cancellations, the length of notice must be the equivalent to the period of leave requested. So if the employee asks for a week off, you must give them a week’s notice that their leave is being denied.      

9. How leave is calculated at the end of employment

An employee leaving the company during a holiday year may be entitled to additional pay for unused leave.

This should be based on a pro-rata payment that takes into account the leave accrued and not taken.

For example, if an employee leaves six months into a holiday year, they may have accrued 14 days leave. If they’ve only used 10 days of that leave, the remaining four days will be added to their final pay.

If the employee has used more leave than they’ve accrued, you can deduct it from their final payment.

💡 Expert insights

What are the key things employers need to consider when deciding how much annual leave to offer above the minimum entitlement within a company annual leave policy?

Insights author: Lauren Mason, Head of People at Learnerbly.

When deciding how much annual leave to offer, employers should consider what the norms are in their industry and region and what breaking from these norms can communicate about a company. 

For example, in the UK the minimum required amount of paid leave is 20 days per year, but any company in the private sector that offers under 25 will stick out like a sore thumb!

Offering the bare minimum may seem efficient at face value from the company’s point of view, but this can send the message that the company doesn’t prioritise the wellbeing and work-life balance of its people. 

In comparison, a company offering a more generous annual leave package is demonstrating their care for the wellbeing and healthy work-life balance of its people. 

These are messages that people consider carefully when evaluating different job offers, so it’s worth considering how your company compares to its competitors from the perspective of its people and potential hires.

It’s also important to remember that the more well-rested your people are, the better their ability to do their best work.

Insights author: Christy Maria Jose, Senior Manager – People Ops at Fingent.

Deciding how much annual leave to offer

Many organizations claim to offer unlimited paid time off (PTO) but this usually comes with caveats and footnotes. Truly unlimited PTO is a tricky thing to implement even if you have the right intentions.

This depends on factors such as the size of your organization, the business process, expectations, deadlines, etc. Not to mention the looming dangers of absenteeism, and burnout on the flip side.

Implementation

1. Invest in a leave management system

There are plenty of leave management systems out there that wouldn’t break the bank. Having one in place offers much flexibility in tracking the leaves and managing the available resources for a smooth operation.

2. Have policies in place

Employees should have the opportunity to take long vacation/ holiday time to switch off and recharge.

However, there should be policies in place to ensure the continuous smooth running of the business. For example requiring  employees to give reasonable notice when going on long vacations and holidays so that the employer has time to accommodate the absence.

3. Transparency and education

Employees need to be familiar with your annual leave policies. The policies should be accessible, easy to understand and a point of contact for questions should be available. 

Current employees should be updated whenever there is a change to the existing policies, and new employees must be informed of during their onboarding process.

Wrapping up

Annual leave is a broad and sometimes complex subject. There are countless methods for how to work out entitlement and many differing guidelines and opinions on the best practices for annual leave entitlements. To recap:

• Full-time employees are entitled to 5.6 weeks of paid annual leave a year. Part-time workers, shift workers and employees working irregular hours are entitled to a pro-rata proportion of the 5.6 weeks statutory minimum.
• Employers can include public and bank holidays in the overall entitlement.
• Annual leave is accrued from the first day an employee starts work.
• Employers must provide employees with written details on leave entitlement.
• The general notice period for taking leave is twice as long as the amount of leave an employee wants to take.
• Employers can refuse a leave request or cancel pre-booked leave but must give as much notice as the amount of leave requested.

Both employers and employees should be aware of the rules and regulations surrounding annual leave and have a clear conversation about the specifics at the start of a new contract.

Photo by Simon Matzinger, published on Pexels