Average Holiday Pay for Monthly Employees: A Payroll Compliance Refresher
Monthly paid employees can still need an average holiday pay calculation. The key question is not how often they are paid, but whether their pay is fixed or includes variable elements such as overtime, commission, allowances, or shift payments.
Under the Working Time Regulations 1998, regulation 16 says: “A worker is entitled to be paid in respect of any period of annual leave to which he is entitled.” The same regulation links holiday pay to the statutory “week’s pay” rules, meaning payroll must identify the correct pay basis before processing leave.
HMRC explains that, for workers paid monthly, the payroll should calculate the worker’s average hourly pay for the month by dividing the monthly pay by the hours worked that month, then multiplying by the weekly hours to calculate the weekly pay. This weekly calculation should then be applied to each of the last 52 paid weeks to determine the average weekly holiday pay.
Important points for payroll teams:
- For fixed salary employees with no variable pay, holiday pay will usually be the normal monthly salary.
- For employees with variable pay, use a 52-week paid reference period.
- Weeks with no pay should be excluded, with a look-back period of up to 104 weeks where needed.
- If the employee has fewer than 52 paid weeks, use all available paid weeks.
- Use gross pay, not net pay, before tax and National Insurance deductions.
What should normally be included:
- Basic pay
- Regular overtime
- Contractual overtime
- Commission linked to work performed
- Regular shift, standby or call-out payments
- Allowances that form part of normal remuneration
What should normally be excluded:
- Genuine expenses
- Benefits in kind
- One-off discretionary bonuses
- Payments not linked to normal work
- Payments outside the relevant reference period
A useful distinction is between statutory leave types. The guidance confirms reforms from 1 January 2024, including changes for irregular hours and part-year workers. For leave years beginning on or after 1 April 2024, rolled-up holiday pay is permitted only for irregular hours and part-year workers, not for ordinary fixed-hours monthly employees.
The compliance takeaway is simple: monthly pay frequency does not remove you from testing holiday pay. Payroll should document the reference period, the pay elements included, the excluded weeks, the calculation method, and the audit trail. This protects the employee’s right to paid leave and helps the employer evidence a reasonable, compliant calculation.