An annual leave encashment calculator determines the payment for unused annual leave when employment ends or when an employee sells leave back to the employer.

Key Takeaways

  • Encashment calculated based on daily rate of pay
  • Tax and National Insurance apply to payments
  • Employment Rights Act 1996 governs entitlement
  • Payment typically made on termination
  • Some employers offer sell-back schemes

How Encashment Works

When Encashment Occurs

  • Termination of employment - unused leave paid out
  • Sell-back schemes - selling leave during employment
  • Contract provisions - as per employment contract
  • Company policy - discretionary schemes

Calculation Methods

  • Daily rate - salary ÷ working days per year
  • Weekly rate - salary ÷ 52 weeks
  • Hourly rate - salary ÷ total hours worked
  • Pro-rata - for part-time workers

Calculator

Step 1: Calculate Daily Rate

Daily Rate = Annual Salary ÷ Working Days Per Year

Example:

  • Annual salary: £30,000
  • Working days: 260 days (52 weeks × 5 days)
  • Daily rate: £30,000 ÷ 260 = £115.38

Step 2: Calculate Encashment

Encashment = Daily Rate × Unused Leave Days

Example:

  • Daily rate: £115.38
  • Unused leave: 10 days
  • Encashment: £115.38 × 10 = £1,153.80

Step 3: Calculate Tax and NI

Tax = Encashment × Tax Rate
NI = Encashment × NI Rate
Net Payment = Encashment - Tax - NI

Example:

  • Encashment: £1,153.80
  • Tax (20%): £230.76
  • NI (12%): £138.46
  • Net payment: £784.58

Tax Implications

Income Tax

  • Taxable income - subject to income tax
  • Tax code - applied at employee’s tax rate
  • PAYE - deducted at source
  • Self-assessment - may need to declare

National Insurance

  • Employee NI - subject to employee contributions
  • Employer NI - subject to employer contributions
  • Rate - based on current NI thresholds
  • Pension - may affect pension contributions

Common Scenarios

Scenario 1: Termination Payment

  • Situation: Employee leaving with 10 days unused leave
  • Calculation: 10 × £115.38 = £1,153.80
  • Tax: Applied at employee’s marginal rate
  • Payment: Made with final pay

Scenario 2: Sell-Back Scheme

  • Situation: Employee selling 5 days during employment
  • Calculation: 5 × £115.38 = £576.90
  • Tax: Applied at employee’s marginal rate
  • Payment: Monthly with salary

Scenario 3: Part-Time Worker

  • Situation: Part-time employee with 5 days unused leave
  • Calculation: 5 × (pro-rata daily rate)
  • Tax: Applied at employee’s marginal rate
  • Payment: Made with final pay

Managing Encashment

For Employers

  1. Calculate accurately - daily rate and unused days
  2. Apply tax correctly - at employee’s marginal rate
  3. Process payment - on time with final pay
  4. Maintain records - for 7 years minimum
  5. Communicate clearly - with employee

For Employees

  1. Check contract - for encashment provisions
  2. Calculate entitlement - unused leave days
  3. Understand tax - implications of payment
  4. Request information - from employer if needed
  5. Seek advice - if rights not respected

Compliance Checklist

  • Daily rate calculated correctly
  • Unused leave days verified
  • Tax and NI applied correctly
  • Payment processed on time
  • Records maintained for 7 years
  • Employment Rights Act 1996 complied with
  • Working Time Regulations 1998 complied with
  • Employee informed of calculation
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