What are the penalties for underpaying holiday pay in the UK in 2026/27?

If you underpay holiday pay, you have to pay the shortfall back. Once the Fair Work Agency (FWA) starts enforcing holiday pay, it is expected to be able to add a penalty of 200% of the underpaid amount on top. The government set up the FWA on 7 April 2026 as part of the changes under the Employment Rights Act 2025, and it intends to start holiday pay enforcement in 2027.

Until then, a worker can already take you to an Employment Tribunal for underpaid holiday pay, as an unlawful deduction from wages. And for deductions made from 1 October 2026, they have six months to do it, instead of the previous three months.

The money you owe is the same on both routes. The FWA route adds a penalty because it issues a Notice of Underpayment: a formal demand to pay a worker what they’re owed within 28 days. If you find and fix an error yourself, you ordinarily pay the back pay and nothing more.

Key takeaways

Question	Answer
Who enforces holiday pay now?	Workers themselves, through the Employment Tribunal
Who will enforce it from 2027?	The Fair Work Agency (FWA)
What is the headline penalty?	200% of the underpaid amount, capped at £20,000 per worker, with a £100 minimum per notice (proposed, mirroring the NMW rules)
Can the penalty be reduced?	Yes, it drops to 100% if you pay within 14 days
How far back can the FWA go?	Six years (proposed), but not before 18 December 2025, when the Employment Rights Act 2025 became law
How far back can a tribunal go?	Generally two years for unlawful deduction claims

What counts as underpaying holiday pay in the UK?

You underpay holiday pay when a worker gets less for annual leave than the law says they should. Acas guidance on calculating holiday pay and GOV.UK’s guidance on holiday pay set out the rules. The mistakes that catch people out are:

• Using the wrong reference period. For workers with variable pay, holiday pay is based on their average pay over the previous 52 paid weeks.
• Leaving regular overtime or commission out of normal pay. Workers with regular hours need it included for the first four weeks of leave, and irregular-hours workers need it included for the full 5.6 weeks.
• Rolling holiday pay into hourly pay for workers who aren’t eligible to be paid that way, or at the wrong rate.
• Miscalculating leave for irregular hours and part-year workers.
• Refusing carry-over when sickness or family leave stopped someone taking their holiday.

Who enforces holiday pay underpayment in 2026?

The Employment Tribunal is the main route for holiday pay claims today, and it starts when a worker complains. The FWA, an executive agency of the Department for Business and Trade, has wider powers, but the government is phasing in its holiday pay enforcement. For a wider view of the agency, read Citation’s guide to what the Fair Work Agency is and what it can do.

Enforcement route	Who runs it	What they can do
Unlawful deduction from wages claim	Employment Tribunal, on a worker’s claim	Order you to pay the shortfall
Working Time Regulations 1998 claim	Employment Tribunal, on a worker’s claim	Order you to pay holiday pay owed
Notice of Underpayment	FWA (holiday pay powers expected 2027)	Require back pay within 28 days, plus a penalty
Tribunal claim on a worker’s behalf	FWA	Bring a claim for a worker who has the right but isn’t pursuing it

Once its holiday pay powers start, the FWA won’t need a complaint to open an investigation. Its officers can ask for documents, enter your premises and inspect your records.

Dominic Cooper, Professional Support Lawyer at Citation, says, “It’s also worth noting that the FWA will take a ‘whole employer’ approach to complaints or concerns about holiday pay. That is, if one employee raises a concern about their own holiday pay, the FWA will audit the holiday pay practices across the wider business.”

What are the financial penalties for underpaying holiday pay?

The Employment Rights Act 2025 builds the holiday pay penalty on the same model as the National Minimum Wage (NMW). The Department for Business and Trade’s consultation, Make Work Pay: holiday pay compliance and enforcement, published on 30 June 2026, proposes the same approach. It closed on 22 September 2026, and the settings below remain as proposals only, until the government publishes its response.

GOV.UK’s guidance on NMW notices of underpayment sets the NMW penalty at 200% of the underpayment, with a £100 minimum per notice and a £20,000 maximum per worker. Under the proposals for holiday pay, you would pay:

• Back pay: a Notice of Underpayment requires you to pay the worker within 28 days, covering sums due in the previous six years.
• A financial penalty: 200% of the underpaid amount, paid to the Secretary of State. It’s capped at £20,000 per worker, with a £100 minimum per notice.
• Less, if you pay fast: the penalty falls to 100% if you pay within 14 days.
• The FWA’s enforcement costs: the Act lets the government make regulations allowing the FWA to charge you for them. A consultation on how to calculate those costs is expected.
• The shortfall, on a tribunal order: a tribunal orders you to pay what the worker is owed.

How is a Notice of Underpayment for holiday pay calculated?

The FWA works out the difference between what you paid a worker for annual leave and what you should have paid, for any period up to six years back. The notice sets out the back pay and the penalty. The consultation says the FWA can’t enforce underpayments that happened before 18 December 2025, so the real look-back depends on when an investigation starts.

Here’s an example to show you how that’d work in practice. Ten employees are each underpaid £100. You owe £1,000 in back pay and a £2,000 penalty. Pay the £1,000 plus £1,000 of the penalty within 14 days, and the FWA waives the remaining £1,000.

The six-year look back is separate from the record-keeping duty. You only have to keep records from 6 April 2026, but a notice can still cover sums due before that date.

You can appeal on limited grounds: no money was due, the calculation is wrong, you paid on time, or the claim covers a period outside the claim period.

Can workers also claim through an Employment Tribunal?

Yes. A worker can claim underpaid holiday pay as an unlawful deduction from wages under the Employment Rights Act 1996, or under the Working Time Regulations 1998. From 2027, the FWA will also be able to bring a claim even if a worker hasn’t brought one.

What is the time limit for a holiday pay tribunal claim?

From 1 October 2026, the Employment Rights Act 2025 extends the time limit for most tribunal claims, including unlawful deduction from wages, from three months less one day to six months. The new limit only applies where the deduction, or the last in a series of deductions, falls on or after 1 October 2026. Earlier deductions keep the three-month limit. The clock runs from the date of the payment, or the last in a series of deductions. And Acas early conciliation can extend it.

How far back can an Employment Tribunal award underpaid holiday pay?

When a worker has been underpaid several times (for example, every time they took a holiday their pay was calculated at the wrong rate), a tribunal can treat the shortfalls as a series of deductions. The Deduction from Wages (Limitation) Regulations 2014 limit how far back a tribunal can award, generally to two years. The FWA’s proposed six-year look-back goes well beyond that.

Can the Fair Work Agency name and shame employers for holiday pay breaches?

The government hasn’t confirmed a naming scheme for holiday pay underpayments. Its consultation asks whether the existing NMW naming scheme should extend to holiday pay. The government already publishes the names of employers that underpay the NMW, so a Notice of Underpayment for holiday pay could become public if it does.

What other consequences can employers face for underpaying holiday pay?

A holiday pay underpayment leads to a notice and a penalty. The other consequences come from related duties and the FWA’s wider powers.

• Missing records: from 6 April 2026, you must keep holiday and holiday pay records for six years. The duty only applies to records from that date, so you’re not expected to produce earlier ones. If you can’t produce records from 6 April 2026 onwards, that’s an offence.
• Obstruction and false information: giving an FWA officer false information, or obstructing them, is a criminal offence.
• Enforcement undertakings: the FWA can ask you to sign a Labour Market Enforcement undertaking, a written promise to change specific practices, which can last up to two years. If you refuse, can’t agree terms or break the promise, the FWA can ask a court for a Labour Market Enforcement order. That’s a binding court order, also lasting up to two years, and breaching it without a reasonable excuse can mean up to two years in prison.
• Wider checks: a notice puts your pay records in front of the FWA, and an inspection can look beyond holiday pay.
• Reputation: if the government extends its naming scheme to holiday pay, a Notice of Underpayment could become public.

What does a holiday pay underpayment cost in practice?

This worked example is illustrative only. The figures and the business are invented. It also assumes the full six years can be claimed. The consultation says underpayments before 18 December 2025 can’t be enforced, so a 2027 investigation would likely cover less.

A hospitality business has 12 bar staff. Each works 30 basic hours a week at £13 an hour, plus 6 hours of regular weekend overtime at £19.50. That makes £507 in a normal week. When staff take holiday, payroll pays the flat hourly rate for their basic hours: £390. Nobody has ever questioned it, because the system was set up that way years ago.

The first four weeks of a worker’s statutory leave must be paid at normal pay, which includes regular overtime. So, four weeks a year are short.

In 2027, the FWA’s holiday pay powers go live and the FWA opens an investigation. The owner has kept holiday records since 6 April 2026, as the law requires, and hands them over. The records are tidy. They also show a flat £390 paid for every week of leave, against a normal week of £507.

The FWA calculates a £117 shortfall for every week of that leave. Over four weeks, the underpayment is £468 a year per worker, or £2,808 over six years. The Notice of Underpayment orders £33,696 in back pay across the 12 staff, payable within 28 days.

The penalty is 200% of that: £67,392, or £5,616 per worker, well under the £20,000 cap. The owner pays the back pay and the penalty at 100% within 14 days, and the total is £67,392. If the 14 days pass, it’s £101,088, before any enforcement costs the FWA may charge.

Item	Amount
Back pay (12 workers, six years)	£33,696
Penalty at 200%	£67,392
Total at 200%	£101,088
Total if penalty paid within 14 days (100%)	£67,392

For comparison, one bar worker claiming alone at tribunal can recover up to two years of shortfall: £936.

The business never decided to underpay anyone. A payroll setting from years ago did, and nobody revisited it.

How can employers avoid holiday pay penalties?

Check your calculations before the FWA’s holiday pay powers start:

• Audit holiday pay against the 52-week reference period for every worker whose pay varies.
• Review how you treat regular overtime and commission.
• Fix any rolled-up holiday pay arrangement that doesn’t meet the rules.
• Keep holiday and holiday pay records from 6 April 2026 and hold them for six years.
• Run a payroll spot-check on part-year and irregular hours workers.
• Correct errors quickly and keep evidence that you did.

Quick answers (FAQs)

What is the penalty for underpaying holiday pay in 2026?

Today, a tribunal orders you to pay the shortfall. Once the FWA starts enforcing holiday pay, expected in 2027, you could also face a penalty of 200% of the underpaid amount, capped at £20,000 per worker.

How far back can the Fair Work Agency claim underpaid holiday pay?

Six years is the proposed look-back. A Notice of Underpayment would cover sums due in the previous six years. Underpayments from before 18 December 2025 can’t be enforced.

Can an employee take me to tribunal for holiday pay even if the Fair Work Agency is already involved?

Yes. A worker still can’t recover the same shortfall twice.

Does rolled-up holiday pay count as underpayment?

It does when you get it wrong. Rolled-up holiday pay is allowed for irregular hours and part-year workers, but you have to pay the right rate and can’t use it where the rules don’t allow.

What is the reference period for calculating holiday pay?

The 52 weeks before the leave, counting the weeks in which the worker was paid.

Will my business be named publicly for underpaying holiday pay?

The government hasn’t confirmed a naming scheme for holiday pay. Its consultation asks whether to extend the NMW scheme.

Does the 200% penalty apply to every underpayment?

No. A penalty comes with a Notice of Underpayment, and the consultation says the FWA would not ordinarily issue a notice if you repay all the arrears before its investigation starts. When it does issue one, the proposed penalty is 200% of the arrears, with a £100 minimum per notice and a £20,000 cap per worker.

Get your holiday pay checked before the FWA does

A Notice of Underpayment means back pay within 28 days and a penalty of up to 200% on top. Citation’s HR consultants review how you calculate holiday pay now, so you find the gaps first. If a worker takes you to tribunal after you’ve followed our advice, we defend the claim and pay awards up to £150,000 per matter.

Call 0345 844 1111 or email hello@citation.co.uk.