To encourage productivity and attract new talent, you’re thinking of introducing a holiday purchase scheme where employees can give up some of their salary for extra leave. What’s the tax position?

Work-life balance

With heightened awareness of mental and physical health, combined with juggling unprecedented care needs, many employees would like the option of requesting extra holiday.

Tip. Having a formal holiday purchase scheme may reduce sick leave and so help you to plan for absences.

Tip. Trading holiday for cash can work both ways. You could allow employees to swap unwanted holiday in return for extra pay. However, make sure they do get their statutory minimum of 28 days per year (for full-time employees).

OpRA rules

Since April 2017 salary sacrifice schemes, where an employee can choose a benefit in kind in lieu of pay, have been subject to anti-avoidance measures known as the optional remuneration arrangement (OpRA) rules. Simply put, they cancel out any tax advantage that would have resulted.

Example. Bill, who’s a higher rate taxpayer, is offered a suite of flexible benefits including a mobile phone package in lieu of pay, worth £1,080 per year. A single mobile phone is usually a tax-free benefit. However, due to the OpRA rules, Bill has to pay £432 tax on it (£1,080 x 40%). Plus, Bill’s employer must pay Class 1A NI at 13.8% of £149.

Cash equivalent

The taxable amount of a benefit for OpRA purposes is its cash equivalent. This is the greater of the cost to the employer of providing the benefit and the taxable amount where special rules apply for calculating it, e.g. company cars.

No monetary value = no benefit

For tax purposes unpaid leave has no monetary value despite any costs that might result for an employer, e.g. lost sales or agency staff to cover absence. HMRC has therefore stated that where an employee becomes entitled to additional unpaid leave they are simply reducing their working hours and having their pay adjusted. Trap. Make sure none of your employees are in danger of falling below the national minimum wage rates – it might be necessary to cap their unpaid leave purchases.

Calculating the reduction

The employee receives a reduced salary based on the number of extra days’ leave taken.

Example. Boudica is paid £35,000 p.a. and works full-time office hours over 260 working days in a year. Every day of extra leave is therefore equivalent to £135 (35,000/260 days). If Boudica chooses to buy five extra days of leave, the reduction of £675 spread over the year results in a monthly salary reduction of £56 (135 x 5)/12.

Tip. Spreading the deductions throughout the tax year maintains a regular salary amount while saving NI costs for the employer. We’ve created a calculator that works out the salary deduction for extra holiday, plus any NI and employer pension contributions saved.

A holiday purchase scheme can be a win-win for you and your employees, helping to avoid burnout, retain employees and boost morale. The special anti-avoidance tax rules don’t apply to extra holiday as it’s not treated as a benefit in kind. The reduction in salary can be spread over the tax year to save employers’ NI.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.