For many of us, annual leave is one of the most valued workplace benefits – whether on a beach in Greece or at home pottering in the garden – it’s an opportunity to rest, recharge, and recuperate away from work. But paid holiday is a relatively modern concept, and its history is closely linked to the evolution of workers’ rights and payroll practice.

Prior to the Holidays with Pay Act 1938 paid holiday was a luxury for the wealthy, if you were a manual or working-class labourer, any time off was unpaid and many employers did not allow it. By 1938 the Act gave some workers the right to one week of paid leave, a huge shift at the time and the beginning of recognising that rest was an important part of work-life balance.

Bank holidays were introduced in The Bank Holidays Act in 1871, but that was largely to allow banks and financial institutions to close, and not for the common worker.

Following the Second World War, the principle of paid leave gained wider support. In 1948, the Universal Declaration of Human Rights formally recognised the right to rest and leisure, including paid holidays. However, in practical terms, holiday entitlement in the UK was still largely determined by employers or trade unions for many years.

That changed significantly in the 1990’s. The Working Time Regulations 1998, introduced following the European Working Time Directive, established a legal minimum of four weeks’ paid annual leave for most workers. This later increased to the 5.6 weeks (or 28 days for a full-time employee) that we know today. Bank holidays can be included in this entitlement, but there is no automatic right to have a bank holiday off – employers can ask you to work them and book your 28 days elsewhere.

For payroll professionals, though, the entitlement itself is only half the story. Calculating holiday pay has become increasingly complex. Historically, holiday pay was often based on basic salary alone. But more recently courts have ruled that regular overtime, and commission payments should also be factored in. This had a significant impact on payroll processing. To help with this, the reference period for workers with irregular earnings was extended from 12 weeks to 52 weeks in 2020, giving a fairer average. More recently, reforms introduced in 2024 simplified calculations for irregular-hour workers, including the return of the 12.07% accrual method.

While annual leave may seem straightforward on the surface, payroll professionals know it is one of the most technically sensitive areas of pay. From one week of paid leave in 1938 to today’s complex statutory framework, annual leave has evolved into an essential part of working life. And for payroll, it remains a perfect example of how employment rights and pay administration continue to develop side by side.

Suggested further reading:

• GOV.UK – Holiday entitlement and pay
• ACAS – Calculating holiday pay
• The Bank Holidays Act 1871
• Holidays with Pay Act 1938
• Working Time Regulations 1998
• Employment Rights Act 1996

Article written by Richard Oxtoby, Advo Payroll Adviser