Government guidelines on this topic advise:
The amount of pay that a worker receives for the holiday they take depends on the number of hours they work and how they are paid for those hours. The principle is that pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work and working.
A worker continues to accrue holiday entitlement while they are on sick leave, maternity leave, parental leave, adoption leave and other types of statutory leave. A worker may request holiday at the same time they are on sick leave.
The majority of the UK’s workforce are full-time workers on fixed hours and fixed pay. For these workers, typically on a fixed monthly salary, if they take a week’s holiday, they will receive the same pay at the end of the month as they normally receive.
The situation becomes more complicated when a worker does not work fixed or regular hours and so does not receive the same amount of pay each week, month or other pay period.
In these circumstances an employer should normally look back at a worker’s previous 52 paid weeks (known as the holiday pay reference period) to calculate what that worker should be paid for a week’s leave.
If a worker has not been in employment for long enough to build up 52 weeks’ worth of pay data, their employer should use the number of complete weeks of data they have. For example, if a worker has been with their employer for 26 complete weeks, that is what the employer should use.
If a worker takes leave before they have been in their job a complete week, then the employer has no data to use for the reference period. In this case the reference period is not used. Instead the employer should pay the worker an amount which fairly represents their pay for the length of time the worker is on leave. In working out what is fair, the employer should consider:
the worker’s pay for the job
the pay already received by the worker (if any)
what other workers doing a comparable role for the employer (or for other employers) are paid