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 National Insurance contributions (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.
• If they 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 typically used by construction sector businesses, but a small number of other businesses use them.

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 This NICs exemption will be withdrawn from 30 October 2012.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 HM Revenue & Customs (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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