Employees earn annual leave as they work. When the financial year ends, some of that leave has been earned but not yet taken. If staff can carry it forward or be paid for it when they leave, the business owes it. FRS 102 treats this as a short-term compensated absence and requires an accrual for the expected cost of the untaken leave that accumulates.
When the accrual matters
The accrual is usually small and steady if staff take leave evenly. It becomes significant when:
- the leave year differs from the financial year (leave runs January to December but the company’s year ends on 31 March, so three months of leave have been earned and largely not yet taken);
- staff have been allowed to carry over a large amount of leave;
- the business is growing fast, so the headcount at the year end is much higher than a year earlier.
If unused leave lapses at the year end and cannot be carried forward or paid, no accrual is needed for it.
Calculating the figure
- List each employee’s leave earned to the balance sheet date, less leave taken, plus any balance brought forward.
- Convert days to cost using the daily rate of pay the employee will receive when the leave is taken (for most staff, contractual salary ÷ working days in the year).
- Add employer’s National Insurance and employer pension on the result.
For example, at 31 March a company has 46 untaken days across its staff with an average daily rate of £150:
| Item | Amount |
|---|---|
| Untaken leave (46 × £150) | £6,900 |
| Employer NIC (estimated) | £900 |
| Employer pension (3%) | £207 |
| Accrual | £8,007 |
The journal
| Account | Debit | Credit |
|---|---|---|
| Wages and salaries | £6,900 | |
| Employer’s NIC | £900 | |
| Employer pension | £207 | |
| Accrued holiday pay | £8,007 |
Next year, only adjust for the movement: if the required accrual rises to £9,000, post a further £993; if it falls, release the difference back to the same expense accounts. Do not reverse and rebook the full amount each month unless you run monthly management accounts that need it.
Irregular-hours and part-year workers
For leave years beginning on or after 1 April 2024, workers with irregular hours and part-year workers accrue holiday at 12.07% of hours worked in each pay period, and employers may pay rolled-up holiday pay instead of paying it when leave is taken. If holiday pay is rolled up into each payslip, there is nothing to accrue for those workers. If it is not, their accrued but untaken entitlement belongs in the calculation above. The holiday pay calculation guide explains how the rate of pay is worked out.
Tax point to remember
An increase in the holiday pay accrual is employee remuneration for tax purposes. It is deductible in the accounting period only if the leave is taken (and paid) within nine months after the period end; otherwise the deduction is deferred to when it is paid.
Checks
- Leave records come from the HR or rota system, signed off by managers, not estimated.
- Directors and staff who left before the year end are excluded (their leave was paid in their final pay).
- The movement in the accrual is explained by headcount and leave patterns.
The accrual sits with other period-end estimates described in accruals and prepayments in the chart of accounts.