Holiday pay is earned during the year before (the accrual year) the holiday is taken and paid instead of salary when the employee takes holiday leave. Employees who were not an employee during the previous year will be entitled to holiday, but without holiday pay from their current employer. As an employer, you must calculate and set aside holiday pay on salary in your accounts.
The right to holiday pay is linked to the term 'employee', i.e. a person who performs work in the service of someone else. Freelancers and independent contractors are not normally entitled to holiday pay under the Annual Holidays Act.
Basis for holiday pay
Holiday pay is calculated on the basis of the employee's salary during the year of accrual. As a general rule, it is remuneration for work which must be included in the calculation. Bonuses and commission-based salary which depend on a personal work contribution must be included in the basis for calculating holiday pay. Travel expenses, subsistence, lodging and holiday pay paid during the year of accrual, for example, should not be included in the basis for the calculation.
You must "set aside" holiday pay for your employees, so that this is shown as a liability in your accounts. This is an accounting provision. You do not need to actually set aside holiday pay in a separate bank account.
Holiday pay amounts to a minimum of 10.2 percent of the salary. For employees over the age of 60, the rate is 12.5 percent. This applies to employees who have a statutory entitlement to holiday of four weeks + one day. Employees aged over 60 years have an extra week's holiday.
Many people are entitled to five weeks' holiday through a collective agreement or other agreement. If this applies to your business, you must set aside holiday pay at the rate of 12 percent. For employees over the age of 60, the rate will then be 14.3 percent.
Payment of holiday pay
According to the Annual Holidays Act, stipulates that you must pay holiday pay by the last ordinary pay day before the holiday, or by no later than one week before the employee takes their holiday. However, it is common to pay holiday pay during a particular month (e.g. June). You must then pay ordinary salary when the employee takes their holiday if they take holiday at any other time. What happens in practice is that you "withhold" the salary in the month in which the holiday pay is paid, and then pay it when the employee actually takes their holiday.
Tax on holiday pay
Holiday pay is generally exempt from payroll withholding tax. This means that you should not deduct tax from holiday pay when it is paid. However, holiday pay constitutes taxable income for the recipient and will be included in the basis for calculating the tax for the income year. What normally happens is that slightly more tax is deducted from the employee's ordinary salary during the rest of the year, so that tax is not actually physically deducted from the holiday pay when it is paid.