Holiday pay

Produced by Tolley in association with Philip Rutherford

The following Employment Tax guidance note Produced by Tolley in association with Philip Rutherford provides comprehensive and up to date tax information covering:

  • Holiday pay
  • Introduction
  • Normal payment times
  • Payment in advance
  • Cumulative tax code
  • Week 1 tax code
  • Leaving employment after the holiday
  • National insurance treatment
  • Method A ― split the payment
  • Method B ― the whole sum
  • More...

Holiday pay

Introduction

As with any other cash payments to an employee, holiday pay should be included in payroll, and is subject to tax and Class 1 NIC. The key consideration is the timing of the payment to the employee and the impact that this has on the timing of the deduction of tax and NIC. Guidance on this subject is in HMRC’s CWG2 section 2.7.4.

For employment law implications relating to holiday pay, please see the Holiday pay guidance note. For more on tax on holiday, see Simon’s Taxes E4.1113 and for NIC, see Simon’s Taxes E8.257. HMRC guidance starts at NIM09100.

Normal payment times

If an employer continues to pay the employee at the usual time, then the employer should continue to deduct PAYE and Class 1 NIC in the normal way.

See Example 1.

Payment in advance

If the employer pays a weekly-paid employee in advance of a period of holiday, the PAYE procedures depend on whether the employee is on a cumulative tax code or a Week 1 tax code. See Example 2.

The same principles apply to monthly-paid staff, but it is much more usual for monthly paid staff to be paid holiday pay at the normal payment time.

Cumulative tax code

If the employee is on a cumulative tax code, calculate and record tax to be deducted under PAYE as if the payment was being made on the payday for the last week of the holiday period.

Typic

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