Holiday pay and PAYE

This guide tells you how to work out and record the correct amount of PAYE (Pay As You Earn) tax and National Insurance contributions (NICs) on payments of holiday pay to your employees.

In many cases you do not need to change your usual procedures. However, if you pay employees' holiday pay in advance or if you use certain holiday pay schemes there may be different steps to follow for PAYE tax and NICs.

On this page:

PAYE tax and NICs if you continue to pay your employee as usual

If you pay your employees on their normal payday(s) when they are on holiday, carry on deducting PAYE tax and NICs in the normal way. You do not need to do anything differently.

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PAYE tax on holiday pay that you pay in advance

If you pay an employee their holiday pay in advance, so that they receive two or more weeks' pay in one week, followed by one or more weeks with no payment from you, you should account for PAYE tax in the following way.

For employees with a cumulative tax code

If your employee is on a cumulative tax code, calculate and record the PAYE tax due using the free pay for the last week in which no pay is received. For example, if an employee is on holiday in weeks 16 and 17 and the wages for those weeks are paid in week 15, PAYE tax should be calculated on the holiday pay using week 17.

For employees with a Week 1/Month 1 tax code

If your employee's code is non-cumulative or Week 1/Month 1, then divide their holiday pay equally between each full week of their holiday and work out the PAYE tax separately for each week.

For employees leaving employment after their holiday

If your employee will be leaving or retiring straight after their holiday, then work out the PAYE tax due on their holiday pay using the free pay for the week in which you pay it to them.

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NICs on holiday pay that you pay in advance

There are special NICs procedures to follow if your employee receives their holiday pay in advance. You can calculate the NICs due on the holiday pay using either of the following two methods.

Method A - split the payment

Split the payment across the weeks that it covers and calculate the NICs due in each week. For example, if you pay an employee two weeks' pay before they go on holiday for two weeks, then calculate and deduct NICs on one week's pay in each of the weeks they are away.

Method B - calculate NICs on the whole sum

If you are using NI Tables to calculate NICs, the following three steps apply:

  1. divide the payment by the number of weeks it covers - three, for example
  2. calculate the NICs due on one of these fractions - using the weekly table for the week in which the payment is made
  3. multiply this NICs figure by the number of weeks - three, for example - to get the total NICs due on the payment

There are other ways of using Method B. For examples see page 29 of HMRC’s publication CWG2, 'Employer Further Guide to PAYE and NICs'. You'll find a link to it at the end of this guide.

Note that Method B cannot be used for employees who are paid monthly, or for holiday pay that is paid through the types of special scheme outlined in the next section.

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Special holiday pay schemes - what to include in gross pay

If you operate any of the following holiday pay schemes, make sure you include the correct amounts in your employees' gross pay when calculating PAYE tax and NICs.

Holiday pay set aside during the year

If an employee voluntarily sets aside some of their pay during the year and you return it to them later as holiday pay - for example, at Christmas or their annual leave - you should include the amount set aside in the employee's gross pay at the time it is set aside. This applies for your calculations of both PAYE tax and NICs.

Holiday credit schemes

Under a holiday credit scheme, you set aside money from your employees' pay each payday and then pay it in a lump sum when they take their holidays. If your employees:

  • have the right to the money whenever they want it, then include it in gross pay, for both PAYE tax and NICs, at the time it is set aside
  • can only have the money when they take their holidays, then include it in gross pay, for both PAYE and NICs, at the time you give them the money

Independently managed central holiday pay funds

These schemes involve employers contributing to an independently managed central fund which then pays out employees' holiday pay. They are only to be used by construction sector businesses and are limited in use to those employees personally involved in construction operations.

Money paid into and out of these funds is currently exempt from NICs for employers who are involved in construction operations and if the employees in question are personally involved in construction work. This NICs exemption will be withdrawn from 30 October 2012.

For PAYE tax purposes, include the cost of holiday pay stamps or credits in gross pay only if the fund you use hasn't been approved by HMRC. If the fund has been approved, you can disregard these costs, as well as any holiday payments to your employees that the fund makes. This is because approved funds already deduct tax from their payments to employees.

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More useful links

Download CWG2, 'Employer Further Guide to PAYE and NICs' (PDF 493K)

Read more about employee holiday rights on the Business Link website (Opens new window)

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