Holiday pay accruals

Q: What does a worked example look like?

Illustration only. A company's year end is 31 December 2026. Its holiday year runs from 1 April to 31 March, and the contract gives 25 days plus bank holidays, with no carry forward. StepEmployee AEmployee B Annual entitlement25 days25 days Earned to 31 December (9 of 12 months)18.75 days18.75 days Taken by 31 December12 days21 days Outstanding6.75 daysMinus 2.25 days, treated as nil Daily salary (annual salary divided by 260 working days)£39,000 / 260 = £150n/a Salary element of accrual£1,012.50Nil The company then adds the employer on costs that will arise on £1,012.50 at the rates expected to apply when the leave is paid. Bank holidays are dealt with separately: if bank holidays falling between the year end and 31 March have not yet been taken but have been earned pro rata, they form part of the calculation too.

Q: Which staff and pay arrangements need special care?

Irregular hours and part year workers. Where holiday pay is paid as rolled up holiday pay with each pay packet, the cost has already been paid and nothing further accrues for that leave. Our guide to holiday pay for irregular hours workers explains when that method is allowed. Leavers after the year end. Their untaken leave at the reporting date is still accrued; payment in lieu after the year end confirms the amount. Sick leave. Paragraph 28.6 recognises that sick leave can also accumulate. Where unused sick pay entitlement carries forward, only the additional amount expected to be paid is accrued, not the full entitlement, because many employees will never use it. Long service sabbaticals. Leave not expected to be settled within 12 months is an other long term employee benefit under paragraph 28.29 and is measured at present value, not under the short term rules.

Annual leave that employees have earned but not taken at the year end, and that they can still take or be paid for, is an accumulating compensated absence under FRS 102 paragraph 28.6. The employer accrues the undiscounted additional amount it expects to pay for that unused entitlement and shows it as falling due within one year. Leave that lapses unused at the year end needs no accrual.

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Why does untaken holiday need an accrual at all?

Section 28 of FRS 102 requires an employer to recognise the cost of all employee benefits that employees have become entitled to through service in the period (paragraph 28.3). Paid annual leave is listed in paragraph 28.4(b) as a short term employee benefit. Paragraph 28.6 then distinguishes two kinds of paid absence:

Accumulating absences can be carried forward and used later if the current entitlement is not used in full. Annual leave is the standard example. The expected cost is recognised as employees render the service that earns the entitlement.
Non accumulating absences are recognised only when the absence happens, at the pay for that period (paragraph 28.7).

So if an employee has worked nine months of a holiday year, they have earned roughly nine months of leave. If they have taken less than that, the business has had the work but will pay for the leave later, and the accrual matches that cost to the period that earned it. This is the same matching logic behind accruals and prepayments generally.

What if the holiday year and the financial year are different?

Where the holiday year runs to the same date as the accounting year and unused leave is lost at that date, there is usually little or nothing to accrue, apart from any days the contract or a policy lets employees carry forward. The accrual becomes significant when the two years differ, for example a calendar year holiday year and a 31 March year end, because at the reporting date employees have earned part of the year’s leave and taken some of it.

The legal background shapes what is “accumulating”. GOV.UK explains that almost all workers are entitled to 5.6 weeks’ paid holiday a year, which for a five day week is 28 days, and that payment in lieu of statutory leave is only allowed when someone leaves, in which case untaken statutory leave must be paid even after dismissal for gross misconduct. Leave above the statutory minimum can have separate rules set by the employer. The contract and holiday policy therefore decide how much unused leave survives the reporting date and has to be accrued.

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How do you calculate the accrual?

For each employee, or for groups on the same terms:

Take the full annual entitlement under the contract, including any days brought forward from the previous holiday year.
Work out the entitlement earned to the reporting date, usually pro rata to the part of the holiday year elapsed.
Deduct leave actually taken in the holiday year up to the reporting date.
Multiply the days outstanding by the daily cost the employer expects to pay when the leave is taken.

Paragraph 28.6 measures the accrual at the undiscounted additional amount the entity expects to pay because of the unused entitlement. Paragraph 28.4(a) treats social security contributions as part of short term benefits alongside wages, so the daily cost commonly includes employer’s National Insurance and employer pension contributions that will be paid on the holiday pay. If a pay rise has been agreed and the leave will be taken after it, the expected rate is arguably the higher one. Whatever basis is chosen should be applied consistently from year to year.

If an employee has taken more leave than earned, the result is negative. Paragraph 28.3(a) allows an asset only where the overpayment will reduce future payments or produce a refund. GOV.UK notes that an employer must not take money from final pay for excess leave unless this was agreed in writing beforehand, so in most cases negative balances are simply set to nil rather than netted against other employees.

What does a worked example look like?

Illustration only. A company’s year end is 31 December 2026. Its holiday year runs from 1 April to 31 March, and the contract gives 25 days plus bank holidays, with no carry forward.

Step	Employee A	Employee B
Annual entitlement	25 days	25 days
Earned to 31 December (9 of 12 months)	18.75 days	18.75 days
Taken by 31 December	12 days	21 days
Outstanding	6.75 days	Minus 2.25 days, treated as nil
Daily salary (annual salary divided by 260 working days)	£39,000 / 260 = £150	n/a
Salary element of accrual	£1,012.50	Nil

The company then adds the employer on costs that will arise on £1,012.50 at the rates expected to apply when the leave is paid. Bank holidays are dealt with separately: if bank holidays falling between the year end and 31 March have not yet been taken but have been earned pro rata, they form part of the calculation too.

Which staff and pay arrangements need special care?

Irregular hours and part year workers. Where holiday pay is paid as rolled up holiday pay with each pay packet, the cost has already been paid and nothing further accrues for that leave. Our guide to holiday pay for irregular hours workers explains when that method is allowed.
Leavers after the year end. Their untaken leave at the reporting date is still accrued; payment in lieu after the year end confirms the amount.
Sick leave. Paragraph 28.6 recognises that sick leave can also accumulate. Where unused sick pay entitlement carries forward, only the additional amount expected to be paid is accrued, not the full entitlement, because many employees will never use it.
Long service sabbaticals. Leave not expected to be settled within 12 months is an other long term employee benefit under paragraph 28.29 and is measured at present value, not under the short term rules.

How is the accrual presented and disclosed?

Paragraph 28.6 requires the amount to be presented as falling due within one year at the reporting date, so it sits within creditors due within one year, normally in accruals. Paragraph 28.39 states that Section 28 does not require specific disclosures about short term employee benefits. Micro entities applying FRS 105 follow the same rule: paragraph 23.5 of FRS 105 uses the same wording on accumulating absences, so the accrual is needed in micro entity accounts as well.

Is the holiday pay accrual deductible for tax?

An accrual for holiday pay is remuneration charged in the accounts, so the nine month rule applies. Under section 1288 of the Corporation Tax Act 2009 (and section 36 of ITTOIA 2005 for unincorporated businesses), remuneration charged in the accounts is deductible for that period only if it is paid within nine months of the period end; otherwise relief is given in the period it is paid. HMRC’s Business Income Manual at BIM47130 explains that remuneration is paid when it is treated as received for employment income purposes, and BIM47140 explains that if the return is filed before the nine months are up, unpaid amounts are added back and the return can be amended later if payment is made in time. Holiday accruals normally reverse as leave is taken in the following months, so in most cases the deduction follows the accounts.

What mistakes come up most often?

Not accruing at all because “it was the same last year”. The movement may be small, but a business that grows or changes its holiday year can see a material swing.
Netting employees who have overtaken leave against those who are owed it.
Using the full statutory entitlement rather than the contract, or forgetting days brought forward from the previous holiday year.
Leaving out employer on costs, or adding them for staff whose holiday pay has already been rolled up into their wages.
Accruing for leave that the policy says lapses at the reporting date.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.