Unpaid leave, holiday leave accrual and tax liability.

[eldar]

Assume you are in a full time job. You ask for, and are granted 4 weeks unpaid leave. No problem, you take it and receive no pay for that period.

During that period, you do not accrue any pension contribution as neither you nor the employer pay. Fair enough.

Do you, though, accrue further holiday during the unpaid leave?

If you don't, no problem.

If you do, is the accrued holiday liable to NI( both employer and employee) and income tax?

If you get 2.5 days holiday per month worked, but get them even with unpaid leave, you've only paid 11/12ths (or thereabouts) of the tax that someone who worked the full year for the same holiday. Is it a taxable benefit, particularly if the difference is between standard and higher rate tax?

Google appear to have no idea..

[MagneticMeerkat]

Errrm....

Taxation is done on a pay as you earn basis - if we're talking about standard income tax on wages here.

Employee National Insurance contributions (Class 2 - I'm a bit rusty on this) work in a similar way. It's all about what you earn.

So your question is, logically, a complete non-issue.

Simply:

Whilst off work you earn an entitlement to a day's holiday.

You return to work and take the day off. As it is paid holiday you will use it during a 'working' month, the career break will be over by this point.

In that month you will earn your salary, adjusted (or not) for the day's holiday. I get paid the same whether I'm in the building or taking leave so it's immaterial.

Therefore I will get taxed/pay NI dependent on how much I have earned that month/over the course of the tax year. If you take a month off the figures will potentially be adjusted down as less income has been received in the relevant period.

Whether you are physically at work or not is completely irrelevant; it's simply calculated by how much you earn.

EDITED!!

Just noticed there's a second part to the question. From a standard HR perspective an employee is allocated a set number of holiday days at the start of the company holiday year (they calculate this). Any carry over from the previous year, extra days 'bought' or 'sold' if the company offers this, is taken into account and the employee is left with a set number of holiday days going forward.

If someone joins part way through the year they are given a pro-rata entitlement. Ditto if someone leaves their usage is taken into account. It's expected, from the HR point of view, that holiday will be taken evenly throughout the year. This stops people doing the sneaky thing of using all of it at once, then resigning immediately afterwards. Generally, in cases of resignation, the employee uses up the remaining pro-rata balance.

Some companies offer extra holiday to long-serving staff - so they start the year with more days than a junior employee. Again it doesn't affect tax treatment.

I have never heard of holiday being accrued on a monthly basis, unless working for a temp agency, where this kind of thing doesn't really apply as tax/NI contributions are all over the place.

Edited by MagneticMeerkat on Friday 31st October 20:16

[Red Devil]

MagneticMeerkat said:

I have never heard of holiday being accrued on a monthly basis

I have. Not temp agency work either. Anyone who left having taken more paid leave than they had accrued to that point had their final pay packet adjusted accordingly (all the staff were monthly paid so it was very unusual for it to result in a negative amount). It was in the T&Cs.

[calibrax]

Red Devil said:

MagneticMeerkat said:

I have never heard of holiday being accrued on a monthly basis

I have. Not temp agency work either. Anyone who left having taken more paid leave than they had accrued to that point had their final pay packet adjusted accordingly (all the staff were monthly paid so it was very unusual for it to result in a negative amount). It was in the T&Cs.

It's normal. In my firm I get 28 days a year, and it accrues monthly at 2.33 days per month.

This is primarily for accounting reasons. Holiday entitlement is a liability, because if someone builds up a large balance by not taking any days off, and then leaves the company, they are entitled to be paid out for those days. So, the company needs to make a provision in the balance sheet to cover this potential liability. Monthly accounting is the norm, so it makes sense to split the allocation monthly as well.

[calibrax]

Also holidays are not liable to tax or NI unless they are actually paid out to you as cash instead of being taken as days off.

[ziontrain]

MagneticMeerkat said:

Employee National Insurance contributions (Class 2 - I'm a bit rusty on this) work in a similar way. It's all about what you earn.

It's Class 1, Class 2 is for those who are self-employed.

[Red Devil]

calibrax said:

It's normal. In my firm I get 28 days a year, and it accrues monthly at 2.33 days per month.

The statutory minimum. Some organisations are more generous. Often it will be to staff with long service (IIRC it was 10 years in one company I worked for}.

[calibrax]

Red Devil said:

The statutory minimum. Some organisations are more generous. Often it will be to staff with long service (IIRC it was 10 years in one company I worked for}.

That 28 day statutory usually includes Bank Holidays, so effectively the minimum is 20 days plus 8 Bank Holidays.

Excluding Bank Holidays, at my firm employees get 23 days, rising to 25 after 5 years and 28 after 10 years.

[Magic919]

Company policy should say whether you accrue holiday or not during unpaid or any other leave.

I can't see any connection between that and taxation.

[Grumpy old git]

My understanding is that you are entitled to annual leave whilst on unpaid leave. The minimum entitlement is the statutory entitlement, i.e. pro rata to 20 days plus whatever bank holidays fall in the period of unpaid leave.

[ging84]

you shouldn't accrue holiday for unpaid leave, in practice you might, depends how the leave is handled HR departments might simply not pick up on it. Really it should depend on what your contract says and what is agreed.
It's possible with a poorly written contract they'd have no grounds to reduce the number of days holiday, however they could easily make it a condition of granting the unpaid leave, and even if they didn't and just reduced your allocation without discussing it with you, if you were to demand your rights to a full years holiday allocation under the contract it probably wouldn't go down too well. The situation might be a little different if the unpaid leave was not by choice.

[BertBert]

This feels entirely down to the company. They can write the rules how they want. So you may or may not accrue leave on the 4 weeks of unpaid leave.
Bert

[Red Devil]

ging84 said:

you shouldn't accrue holiday for unpaid leave, in practice you might, depends how the leave is handled HR departments might simply not pick up on it. Really it should depend on what your contract says and what is agreed.
It's possible with a poorly written contract they'd have no grounds to reduce the number of days holiday, however they could easily make it a condition of granting the unpaid leave, and even if they didn't and just reduced your allocation without discussing it with you, if you were to demand your rights to a full years holiday allocation under the contract it probably wouldn't go down too well. The situation might be a little different if the unpaid leave was not by choice.

.
http://www.lawsociety.org.uk/advice/practice-notes...

Paragraph 5.5 said:

While there is no decided case on the point, applying the same reasoning in relation to the accrual of holiday during sickness absences, it is clearly arguable that holiday will accrue during other types of leave, for example unpaid leave or disciplinary suspension, and the right to take the leave will exist when the worker returns.

[eldar]

Thanks for all the comments. The background is that someone too a month and a bit off as unpaid leave, and a couple of others decided it wasn't fair that they got an extra 2.5 days holiday while on holiday, and all sorts of various scenarios why it 'wasn't fair' were constructed. All fairly clearly crap, with with just enough plausibility to sound vaguely possible.

So, sorted, unpaid leave bloke got what was agreed, no tax implications and the wingers can STFU. Peace can return