What is the Difference Between Holiday Pay and Annual Leave?

What is the Difference Between Holiday Pay and Annual Leave?

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It’s common to confuse the Annual Leave in Advance with the Holiday Pay and not be sure how to record and pay them out correctly. The thing to remember is that there is never a situation where Holiday Pay is paid out, unless the employee is being terminated. This can happen at the end of employment, or if an employee is changing from Casual to Permanent and is thus being “terminated” and then reloaded as a new employee in Xero Payroll, under a new employment contract.

So if an employee has been working for say 9 months, and would like to take some leave, then this is recorded correctly in Xero Payroll as Annual Leave taken in advance. Even though there is no Annual Leave accrued – and won’t be until 12 months have been worked – knowing that 4 weeks will be accrued at the 12 month mark, it’s quite sensible and normal to allow some leave to be taken.

Once this is processed, there will be a negative Annual Leave balance, and the Holiday Pay balance will remain unchanged.

At the 12 month mark, the Holiday Pay balance will completely reverse out back to Nil, and the Annual Leave due will be accrued. View this on the Leave Transactions report.

To see a conversion of the holiday pay into approximately the amount of Annual Leave Hours available, drill into the Annual Leave Balance and tick the box that sais, “Show Annual Leave in Advance”

Doing this converts the holiday pay balance into Xero’s best approximation of Annual Leave Hours and adds it to the Annual Leave balance. Bear in mind that the Holiday Pay Balance will still display just the same, but the conversion of the holiday pay to Annual Leave will also have been added to the Annual Leave Balance – so you are seeing the holiday pay represented twice.

Here’s an example where the only difference is whether the box is ticked or not:

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