Holiday purchase schemes are a popular employee benefit, and it’s easy to see why. Extra time off is something most people value, and giving employees the flexibility to buy additional leave can be a low-cost way to enhance your benefits offering without a significant financial outlay for the business.
We see requests to support these schemes fairly regularly, so it felt worth sharing some practical guidance on what you need to think about from a payroll perspective before you set one up.
The good news first
If you have a clear process and well-defined rules in place, the payrolling side is relatively straightforward.
The most common approach is to calculate the total value of the additional leave being purchased, allocate that as a balance against each participating employee, and then apply a regular deduction from gross pay each month until the agreed amount has been recovered in full.
Spread across the year, the monthly deduction is usually manageable for employees, and the process runs predictably once it’s established.
The arrangement is typically structured as a salary sacrifice, which means the deduction is taken from gross pay before tax and National Insurance. That can actually work in the employee’s favour financially, though it does bring a few important considerations to the table.
Things to get right from the start
National Minimum Wage
This is the one you can’t afford to overlook.
Deductions made through salary sacrifice must not reduce an employee’s pay below the National Minimum Wage. That assessment is straightforward in isolation, but it becomes more complex when you factor in any other salary sacrifice arrangements the employee already has in place, such as a Cycle to Work scheme or electric vehicle benefit. You need to look at the combined effect across all deductions, not each one individually.
Formal documentation
Because this is a salary sacrifice arrangement, it constitutes a change to the employee’s contractual terms. That means it needs to be formally documented and agreed with each participating employee in advance.
A clear agreement setting out the amount being purchased, the deduction schedule, and the conditions attached to the scheme is essential. This protects both the employee and the business if any disputes arise later.
Pension implications
Salary sacrifice affects pensionable pay, which in turn can affect pension contributions, both what the employee pays in and what the employer contributes.
The impact will depend on how your pension scheme is set up and how pensionable pay is defined within it. This is worth working through carefully and, where relevant, communicating clearly to employees before they sign up so there are no surprises.
What happens when someone leaves
If an employee leaves mid-year with an outstanding balance, you need a clear policy on how that’s handled.
- Can the remaining amount be recovered from their final pay?
- What happens if their notice pay doesn’t cover it?
Establishing these rules in advance and including them in the scheme documentation avoids difficult conversations and potential disputes at the point of departure.
Periods of statutory pay
This one catches people out.
If an employee goes on maternity leave, adoption leave, or experiences a period of long-term sickness where they’re receiving statutory pay only, deductions will need to pause.
You can’t make salary sacrifice deductions from statutory payments. It’s important to build this into your scheme rules and ensure your payroll process can accommodate it cleanly, including how any outstanding balance is managed when the employee returns.
A practical tip on keeping it manageable
It’s well worth setting a limit on how many days can be purchased and restricting when applications can be made, typically once a year during an open window. Without this, you can find yourself fielding requests throughout the year and constantly recalculating balances and deduction schedules. A defined window and a cap on how much leave can be purchased keep the scheme fair and keep the administrative burden on your HR and payroll teams to a manageable level.
Getting it set up properly
Holiday purchase schemes are a good benefit when they’re designed well. The key is putting in the groundwork before you launch: clear written rules, proper documentation, a thorough NMW check, and joined-up communication with employees about how the deductions work and what the pension implications might be.
If you’re thinking about introducing a scheme and want to make sure the payroll side is set up correctly from the start, we’re happy to talk it through. Get in touch with the team at Ascend.
