This blog post aims to help readers in answering the question of whether or not they need to pay income tax on their holiday pay. For this purpose, we will discuss in detail the general ruling on the matter as well as the amount of tax due and the process of its calculation if and when you need to pay tax on your Holiday Pay. In the end, we will also discuss the consequences of not paying your taxes.

Do You Have To Pay Tax On Your Holiday Pay?

Yes, you have to pay tax on your holiday pay. Holiday Pay is a taxable income; therefore it is subject to statutory deductions such as income tax.

According to Working Time Regulations 1998 where workers are entitled to holiday pay, their earnings during this time remain subject to income tax as well as National Insurance contributions.

This ruling applies whether you are paid Holiday Pay in advance or on an accrual basis; whether you are a full-time worker, a part-time worker or a zero-hour contract worker. 

However, as your worker status changes, so will the number of permitted days for the holiday. As the number of days for which you can claim Holiday Pay, the amount that you will get will also reduce. 

This means that employees who work for longer hours will have a higher Holiday Pay entitlement and therefore will be paying more income tax as compared to those who work for fewer hours.

The tax deducted from your Holiday Pay will be calculated in the same way as the income tax rate that applies to your regular income is calculated. This means that the income tax rate that is applied to your Holiday Pay will be calculated in the same way as your regular income is taxed. 

Incomes above the minimum cap are taxed at an incremental rate of 20% to 45% depending on whether an individual belongs to the basic, higher or additional tax rate band. 

However, there is no adjustment for Personal Allowances when the tax on Holiday Pay is calculated as Personal Allowance is only applied to one source of income and is already applied to your annual wages.

On the other hand, if you are being paid your Holiday Pay along with other allowances as part of a redundancy package, the first £30,000 of the amount you get from your employer while leaving the job in such a case will be tax-free. In addition to this, you will not be required to make a National Insurance contribution to it as well.

What Is The Income Tax Rate On My Holiday Pay?

The income tax rate that applies to your Holiday Pay is based on the same calculation as per your regular income. These include the following:

  • you will be charged with 0% income tax when your income is up to £12,570
  • you will be charged with 20% income tax when your income is between £12,571 and £50,270 
  • you will be charged a 40% income tax when your income is between £50,271 and £150,000 
  • you will be charged with 45% income tax when your income is above £150,001

Most workers in the UK are entitled to 5.6 weeks of Holiday Pay; based on which you can calculate your holiday entitlement and get an estimate of income tax deduction.

In addition to the income tax rates, another factor that determines your income tax deduction is the tax code. These are a combination of letters and numbers that determine the amount of income tax due on an individual. 

While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer or pension provider the amount of tax-free income that you are eligible for in that tax year. 

To confirm your tax code, you can check your Payslip, P45 form, P60, PAYE coding notice, Pension advice slip or the HMRC website.

Are There Any Tax-Free Incomes?

Yes, there are certain incomes which are tax-free. Incomes derived from any of the following sources are considered to be tax-free in the UK:

  • Transport costs of an employee’s (and their immediate family) relocation for work in the UK
  • Winnings from games, pool betting, lotteries or competitions with prizes
  • Long-service employee awards (certain limitations apply)
  • Individual savings account amounting to £20,000
  • Incomes such as interest or dividends arising from savings accounts 
  • Pensions paid to war widows and dependents
  • Social security and state benefits include maternity allowance, employment and support allowance, attendance allowance, child tax credit and housing benefit. 

What Happens If You Don’t Pay Taxes?

If you don’t pay taxes on purpose and the HMRC suspects you of tax evasion, they can conduct tax enquiries as far back as 20 years to gather the evidence and then take legal action.

When taxes remain unpaid, the HMRC charges a penalty first at a 30-day delay of payment, then again at 6 months and finally at 12 months. The penalty is 5% of the original amount owed by an individual.

If an individual deliberately avoids paying taxes or is unable to honour the terms agreed to in the “time to pay agreement”, HMRC can take the following action against them:

  • Confiscate possessions; which include vehicles that will later be sold at auction(called ‘distraint’)
  • Transfer funds directly from your bank account, if your debt is £1,000 or more
  • take court action
  • make you run bankrupt, or close down your business

If you have not paid your taxes unintentionally, you can report your situation to HMRC as soon as you realise that you have unpaid taxes. In this case, chances are high that you will not be prosecuted. Additionally, if you cooperate during the investigation, you can also avoid being penalised with hefty fines.

Conclusion:

The above discussion makes it clear that if you receive Holiday Pay, you will also have to pay income tax on it as well as contribute to National Insurance in the same way as you would do with your regular pay. Not paying your taxes makes you a tax evader for which the HMRC can conduct an investigation, fine you with hefty penalties or even take you to court for a prison sentence.

References:

Holiday Pay for PAYE Agency Workers | Morgan McKinley Recruitment.

Paying an employee in advance for holidays or from the holiday pay scheme – GOV.UK

Income Tax rates and Personal Allowances: Previous tax years – GOV.UK

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