New legislation introduced in the final days of the 2025/26 tax year has significantly strengthened employer responsibilities around statutory annual leave and holiday pay. Through Section 35 of the Employment Rights Act 2025 and its commencement via S.I. 2026/323 reg. 3(1)(8), employers are now legally required, from 6 April 2026, to keep comprehensive, auditable records demonstrating compliance with the Working Time Regulations 1998 (WTR). This change was not widely publicised and did not appear clearly in government timelines, leaving employers with very limited time to prepare.

The new law introduces a mandatory duty to maintain accurate records showing compliance with statutory annual leave entitlements, holiday pay calculations and payments in lieu. These records must evidence adherence to key WTR provisions, including basic and additional annual leave (regulations 13 and 13A), irregular hours/part year worker accrual (regulation 15B), payments in lieu on termination (regulations 14 and 15E), and the correct calculation of a week’s pay (regulation 16). All records must be kept for six years, in any format the employer reasonably considers appropriate.

The reform coincides with the expansion of the Fair Work Agency, which will hold enforcement powers over statutory holiday pay. As such, the obligation signals a shift to more active enforcement, particularly in areas where workers historically receive incorrect or incomplete holiday pay.

  • In practice, employers must now keep clear and robust documentation covering: Workers’ ordinary (20 days) and additional (1.6 weeks) annual leave entitlement and usage
  • Any leave carried forward, including the reason it was permitted and evidence supporting carry over
  • Detailed holiday pay calculations, including all pay components included or excluded
  • All payments made in lieu of annual leave, including for carried over leave and for irregular hours workers

Although many organisations already hold some of this information, the legal requirement to maintain it systematically, and for an extended retention period, creates a new compliance burden. Employers should urgently assess whether their HR, payroll and recordkeeping systems are robust enough to withstand scrutiny, particularly where entitlement calculations or variable pay elements are complex. The changes provide little implementation time, making immediate action essential to ensure compliance and avoid future enforcement risks.

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What are the changes?

Several core provisions within the Working Time Regulations 1998 shape how annual leave must be granted, accrued, recorded and paid. Recent changes introduced through the Employment Rights Act 2025 strengthen employers’ obligations by requiring accurate recordkeeping for compliance with specific regulations. These records must demonstrate adherence to:

  • Regulation 13(1)
  • Regulation 13A(1)
  • Regulation 15B(2)
  • Regulation 15E(2)
  • Regulation 14(2) and 14(6)
  • Regulation 16(1)

These records must be retained for six years from the date they are made, and employers may keep them in any format they reasonably consider appropriate.

Section 35 is:

Duty to keep records relating to annual leave:

(1) The Working Time Regulations 1998 (S.I. 1998/1833) are amended as follows.

(2) In Part 2 (rights and obligations concerning working time), after regulation 16A insert-

“16B”. Records relating to annual leave entitlement

(1) An employer must-

(a)keep records which are adequate to show whether the employer has complied with the entitlements conferred by regulations 13(1), 13A(1), 15B(2) and 16(1) and the requirements in regulations 14(2) and (6) and 15E(2);

(b)retain such records for six years from the date on which they were made.

(2) The records referred to in paragraph (1)(a) may be created, maintained and kept in such manner and format as the employer reasonably thinks fit.”

(3) In regulation 29 (offences), in paragraph (1), after “the relevant requirements” insert “or with regulation 16B(1)”.

(4) In regulation 29C (restriction on institution of proceedings in England and Wales)-

(a)the existing provision becomes paragraph (1);

(b)after that paragraph insert-

“(2) But paragraph (1) does not prevent the Secretary of State from instituting proceedings in England and Wales for an offence under regulation 29(1) in respect of a failure to comply with regulation 16B(1) (duty to keep records).”

What is each section?

Regulation 13(1): Statutory Annual Leave Entitlement

Under regulation 13(1), every worker is entitled to four weeks of annual leave in each leave year (subject to limited exceptions). This represents the EU derived baseline holiday entitlement.

Regulation 13A(1): Additional Annual Leave

Regulation 13A(1) entitles workers to an additional period of annual leave, ultimately amounting to 1.6 weeks, giving the total UK statutory minimum of 5.6 weeks per year when combined with regulation 13 entitlement.

Regulation 14(2): Payment in Lieu Where Employment Terminates

Regulation 14(2) applies when a worker’s employment terminates partway through the leave year. If the worker has taken less leave than proportionally accrued, the employer must make a payment in lieu of the untaken leave.

The payment is calculated under regulation 14(3) using either:

  • a formula specified in a relevant agreement
  • or, if none exists, an amount equal to what the worker would have received under regulation 16
Regulation 14(6): Payment in Lieu of Carried Forward Leave

Regulation 14(6) applies where, at the termination date, the worker still has untaken leave that was carried over from a previous leave year under various permitted carry forward rules (e.g., family related or sickness related). The employer must pay the worker a payment in lieu equal to the amount payable under regulation 16 for that untaken leave.

Regulation 15B(2): Leave Accrual for Irregular Hours and Part Year Workers

Regulation 15B (inserted from 1 January 2024) establishes a new system for workers with irregular hours or part year patterns. Under regulation 15B(2), statutory annual leave for such workers can either be accrued in hours, calculated at 12.07% of the hours worked in each pay period, and paid when leave is booked.

Regulation 15E(2): Payment in Lieu on Termination for Workers Covered by 15B

Regulation 15E applies to the same category of workers as regulation 15B. Under regulation 15E(2), if: the worker’s employment ends during the leave year, and they have not taken all the annual leave accrued under regulation 15B(2), the employer must make a payment in lieu of that untaken leave.

The calculation is:

  • either the amount specified in a relevant agreement
  • or, if no such agreement exists, the amount that would have been due under regulation 16
Regulation 16(1): Holiday Pay for Statutory Leave

Regulation 16(1) requires that workers must be paid a week’s pay for each week of annual leave taken under regulations 13 and 13A. The definition of a “week’s pay” is imported from sections 221–224 of the Employment Rights Act 1996 (with minor modifications).

What does the employer need to demonstrate?

Regulation 13(1): Statutory Annual Leave Entitlement:
  • Employers must be able to evidence that the worker’s full 4 week entitlement has been correctly accrued, made available and taken in accordance with the regulation
Regulation 13A(1): Additional Annual Leave
  • Employers must maintain records showing that the worker receives their additional 1.6 weeks of annual leave and how it is applied
Regulation 14(2): Payment in Lieu Where Employment Terminates
  • Keep accurate records of proportional leave accrued vs taken, and the correct payment calculation.
Regulation 14(6): Payment in Lieu of Carried Forward Leave
  • Maintain records identifying carried forward leave and demonstrate that correct payment in lieu was made
Regulation 15B(2): Leave Accrual for Irregular Hours and Part Year Workers

Employers must keep records showing:

  • hours worked each pay period,
  • the 12.07% accrual calculation,
  • resulting leave balance.
Regulation 15E(2): Payment in Lieu on Termination for Workers Covered by 15B

Keep records showing:

  • the worker’s accrued leave under reg. 15B,
  • leave taken vs untaken,
  • payment in lieu that aligns with reg. 16 where required
Regulation 16(1): Holiday Pay for Statutory Leave
  • Maintain payroll and entitlement records proving that the correct “week’s pay” has been applied for statutory holiday.

In real terms what does this mean for employers?

In reality these records should already be kept, for worst case that you have to defend an unpaid wages claim, but more importantly day to day so that you are ensuring that you pay your employees correctly, and on time, and can also any questions that they may have on pay or entitlement.

Ordinary and additional annual leave

Employers are now required to keep detailed records showing that every worker has received both their ordinary annual leave which is the statutory 20 days under regulation 13 and their additional annual leave which is the 1.6 weeks under regulation 13A. These statutory entitlements total 5.6 weeks of paid annual leave per year and must be clearly tracked to ensure compliance. Organisations must document each worker’s accruing entitlement throughout the leave year, as well as the leave actually taken, in order to demonstrate that workers have been afforded their full statutory rights. This includes maintaining clear distinctions between ordinary leave and additional leave categories within HR or payroll systems, ensuring that both forms of entitlement remain visible, auditable and available for review by enforcement bodies.

Annual leave carried forward from previous years

The legislation also requires employers to keep records of any leave carried forward into the current year, whether permitted under statutory rules or agreed contractually. This includes leave carried forward due to situations such as sickness absence or statutory family leave, as well as any additional carryover allowances offered by the employer. Employers must document not only the amount of leave carried forward but also the reason it was permitted, ensuring they can demonstrate compliance with regulation 14(6) where carried over leave must be paid in lieu upon termination. This means organisations should maintain precise audit trails of carried over balances, associated evidence such as medical or statutory leave records, and any internal approvals or contractual provisions authorising extra carry forward.

Details of holiday pay, including which pay elements have been included or excluded

Another major component of the new duty is the requirement to retain detailed information on how holiday pay is calculated. Under regulation 16(1) of the Working Time Regulations, workers must receive a “week’s pay” for each week of statutory leave. The Employment Rights Act 2025 now requires employers to clearly document all pay elements used in this calculation, including overtime, bonuses, commission and other variable components, as well as any elements deliberately excluded. This ensures transparency and prevents underpayment, an area historically prone to error. To comply, employers must maintain full payroll data showing how each week’s pay was determined, keep records of reference periods used for averaging fluctuating pay, and ensure these calculations can be reproduced should the Fair Work Agency or tribunal request evidence.

Any payments in lieu of annual leave, including for carried over leave

Employers must also record all payments made in lieu of untaken statutory annual leave, including payments at termination of employment. This requirement covers payments made under regulation 14(2) for untaken current‑year leave, regulation 14(6) for untaken carried‑over leave, and regulation 15E(2) for irregular‑hours or part‑year workers whose leave accrues under regulation 15B. To comply, employers must document the worker’s leave balance at the termination date, the statutory category of the leave being paid out, and the method used to calculate the payment in lieu. Organisations must also ensure that these payments align with the rules in regulation 16 on what constitutes a week’s pay. Maintaining precise termination files, including final payslips, holiday balance statements and calculation worksheets, will be essential for demonstrating compliance during an audit or investigation.

Conclusion

From 6 April 2026, the holiday pay landscape becomes materially more audit-focused, because employers will need to be able to evidence compliance through records that stand up to scrutiny and remain accessible for the required retention period, which in turn makes data quality, ownership and process discipline central to managing risk rather than an administrative afterthought. The most practical response is to move quickly by tightening governance across HR and payroll, clarifying how entitlement and pay are evidenced end-to-end, and ensuring that queries or enforcement engagement can be handled with confidence and minimal disruption.

If you want to strengthen controls while reducing the manual burden, Zellis can help. 

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