When someone leaves your business, there’s a good chance they’ll have some annual leave saved up that they haven’t used yet.

What happens to that leave? And how does it differ if they leave, get the sack, or get made redundant?

Here’s our short guide to what happens to unused annual leave when an employee leaves your business.

Final pay and annual leave allowance

A reminder of how statutory annual leave works: in the UK, every full time worker is granted 28 days of annual leave per year, which includes the days off they get for bank holidays.

When someone leaves their job, their final pay should usually consist of their last month’s working time, plus any appropriate redundancy pay, and leftover holidays.

When they leave the business, their employer has to pay the equivalent amount of days remaining in the leave allowance. So if there’s 3 unused holidays, that means 3 days’ worth of pay. Simple. This is called payment in lieu of holiday.

The opposite applies too, though. If for some reason they’ve taken more holiday than they built up, the business can deduct the appropriate amount of pay from their final pay packet. (This might happen if annual leave isn’t very well organised in the company - we’ve got just the fix for that.)

The above only applies to statutory holiday (the legal minimum). There may well be more than that if the business offers more leave as part of their employee contract.

Calculating final holiday pay when someone leaves the business

There’s a simple formula to work out how much holiday pay your leaver will get.

It’s (A x B) - C, where:

  • A is their holiday entitlement for the full year
  • B is the proportion of the year that’s gone by the time of leaving
  • C is the amount of leave already taken

Let’s say Jeff leaves on the 30th April. He’s been working regular 9-5 hours, 5 days a week. He gets the usual statutory 28 days holiday allowance per year, and has used 6 days of it already by the time his notice period ends.

B would be 4/12, or 33%, as a third of the year has passed:

(28 x 0.33) - 6 = 3.24

You might round that up to 3.5. So Jeff gets 3 and a half days final holiday pay.

Saving money with a piggy bank
Photo by Michael Longmire / Unsplash

Do you pay final holiday pay if you sack an employee?

The simple answer - yes you do. Even if it’s a sacking due to gross misconduct, the law states you must pay what they're owed, and that includes unused holiday allowance.

The date the holiday pay will be calculated up to is the employee termination date. That’s the end of the notice period you give them. If it’s an on-the-spot sacking where you send them home on the day, that’s the day you should calculate it to.

What else affects final holiday pay?

If the worker wants to take holiday during their notice period, that shouldn’t be a problem. Treat the notice period as normal working time, and simply deduct the days from the final holiday pay amount. Check out our guide to holiday requests within the notice period for more detailed info.

However, if they decide to leave without giving the correct notice period, that might breach their employment contract. If the contract has any clauses about pay deductions in this case, it’s up to you to implement that.

Redundancy shouldn’t affect final holiday pay. It should just be added to any other pay you give as part of the redundancy package.

If you’d like more guidance on calculating holiday pay amounts for your employees, Gov.UK is a good place to start.

Their guides for calculating holidays for those without fixed hours or pay can come in particularly handy too.