I Got Paid Holiday Pay After Leaving, Will It Affect My Tax

When you leave a job your employer must pay you for any unused holiday you have built up but not taken. This is known as holiday pay in lieu. It is completely normal and required by UK employment law although many people are surprised when it arrives on a final payslip and even more surprised when the tax deducted seems higher than expected. In my opinion holiday pay can be confusing because it arrives as a single lump sum and appears to push your tax up even when your overall income for the year is relatively low.

This guide explains whether holiday pay paid after leaving a job affects your tax, how PAYE works on a final payment, why the tax might look higher, how HMRC corrects things, what to do if you think you have been overtaxed and how to claim a refund if needed. I will also walk through real examples because this is one of the most common tax questions employees ask after finishing a role.

By the end you will understand exactly how holiday pay after leaving influences your tax position and what steps to take if anything looks wrong.

What Holiday Pay After Leaving Actually Is

When you leave a job your employer must calculate the holiday you accrued up to your final working day. If you did not take all your entitlement they must pay you for the unused days. This payment is treated as normal wages for tax purposes.

Holiday pay in lieu is:

Taxable
Subject to National Insurance
Included in your final P45
Reported to HMRC through PAYE

Even if you left earlier in the month and received the payment later it still forms part of your taxable income for the tax year.

Does Holiday Pay Affect Your Tax?

Yes, but only in the normal way that any earnings do. Holiday pay is treated exactly the same as normal salary. There are no special tax rules for holiday pay taken after leaving.

Holiday pay:

Is added to your taxable pay
Is taxed through PAYE
May increase the tax shown on your final payslip
May cause a temporary overpayment
Will be corrected automatically by HMRC

It does not push you into a higher tax bracket unless your total income across the whole tax year is high enough to reach the next band.

In my opinion most people worry because their final payslip looks different to the payslips they were used to. This does not mean your annual tax position has changed in a harmful way.

Why the Tax on My Final Holiday Payment Looks High

There are several reasons your holiday pay in lieu might be taxed more heavily than you expect.

1. You may have been put onto a Week 1 or Month 1 tax code

Many employers switch employees onto a Week 1 or Month 1 code when they process a final payment. This code ignores your cumulative earnings for the year and can cause more tax to be deducted in that single month.

Week 1 and Month 1 codes treat your final payment as if it is the first time you have been paid that year which almost always increases the tax taken.

2. Your final holiday payment is a lump sum

A large single payment often looks as if it is taxed higher but PAYE uses the same calculation regardless of whether income is paid weekly, monthly or as a one off.

3. Your final payment may include other adjustments

For example:

Your final wages
Accrued holiday pay
Bonus
Overtime
Repayment of a salary overpayment
Deductions for benefits

All of these affect the final tax calculation.

4. Your employer may apply the wrong tax code

If your P45 has not been generated or HMRC records have not been updated your employer may use the emergency tax code or an older code.

5. You might not have used your full personal allowance yet

If you left a job part way through the tax year you may underpay or overpay depending on when your income stopped.

In my experience this is one of the most misunderstood issues. PAYE tries to estimate your total earnings for the year so when income suddenly spikes or ends it gets things wrong temporarily. HMRC will always correct it later.

Will HMRC Fix Any Overpayment Automatically?

Yes. When you leave a job your employer sends HMRC your final pay and tax figures through payroll. If HMRC later sees that you paid too much tax they will issue a refund automatically, usually after the tax year ends.

This normally happens between June and October when HMRC carries out its routine end of year tax checks. You may receive:

A P800 tax calculation
A simple assessment
A direct refund
A message in your personal tax account

If you do not want to wait for HMRC’s automatic calculation you can request a refund sooner.

Can Holiday Pay Push Me Into a Higher Tax Band?

Only if your total income for the entire tax year crosses a threshold such as:

£12,570 personal allowance
£50,270 higher rate threshold

If your holiday pay is only a few hundred pounds or even a couple of thousand pounds it is unlikely to affect your tax band unless you were already near a limit.

In my opinion most people worry because they see a larger deduction on the final payslip without realising that PAYE is automatically recalculated later.

How Holiday Pay Appears on Your P45

Your P45 shows:

Total pay in this job
Total tax paid in this job
Your tax code
Leaving date

Holiday pay in lieu forms part of the “total pay to date” figure. When you start a new job your new employer will use your P45 to calculate the correct tax going forward.

If you do not start another job until later you may temporarily pay too much or too little although HMRC will correct this.

What Happens If I Leave My Job Mid Year

If you leave your job during the tax year PAYE may not perfectly match your annual entitlement. You might:

Have unused personal allowance
Have overpaid tax
Have underpaid tax
Have holiday pay that appears to distort your tax

Leaving part way through the year often results in overpayments especially if your income drops after leaving.

Holiday pay does not cause this by itself. The change in your expected annual income does.

Real World Examples of Holiday Pay and Tax

Example 1: Leaving in June with Accrued Holiday

You worked April to June
You earned £9,000
Your holiday pay was £500
You paid tax based on expected annual income

Because you left early you may not use all your personal allowance. HMRC may owe you a refund.

Example 2: Leaving in December with a Lump Sum Holiday Payment

Your yearly income was stable
Your holiday pay increased your December total
PAYE temporarily deducted more tax

The tax looks high for that month although your total year position remains correct.

Example 3: You Started a New Job Straight Away

Your new employer uses your P45
PAYE adjusts across your new earnings
Overpayments generally correct themselves

Example 4: You Have More Than One Job

Holiday pay from one employer may create the impression of higher annual income
PAYE can misinterpret your situation
HMRC often amends your tax code

Example 5: You Had No Job After Leaving

Your income drops
Your holiday pay might have been taxed too heavily
HMRC will look at your total annual income and refund if necessary

What To Do If You Think You Were Overtaxed

1. Check your P45

Make sure:

Your final pay is correct
Holiday pay is included
Tax deducted matches your final payslip

2. Log into your online HMRC personal tax account

You can see:

Your employment history
PAYE reported by employers
Your tax code
Refunds owed

3. Use HMRC’s tax refund service

If you stopped working and will not earn more that year you can use form P50 to claim your refund.

4. Wait for the end of year tax calculation

HMRC automatically checks your tax after the year closes and issues refunds for overpayments.

5. Contact HMRC if something looks wrong

Incorrect employment records
Incorrect income showing
Duplicate jobs
Wrong dates

These errors can affect your tax code and refunds.

In my opinion the fastest route is checking your tax account online because it shows exactly what HMRC has on file.

Will It Affect My Benefits or Universal Credit?

Holiday pay counts as earnings for the month it is paid. It may:

Reduce Universal Credit for one assessment period
Affect contribution based benefits for that period

But it will not affect:

Future State Pension
Your long term tax position
Future benefits once the assessment period has passed

Will It Affect My National Insurance?

Holiday pay is treated as normal pay for NI purposes. This means:

NI may be deducted
It counts towards your qualifying year
It may contribute to a full NI year

In many cases holiday pay helps ensure you meet the contribution threshold for that year.

Can I Avoid Being Overtaxed on Holiday Pay?

The employer must tax holiday pay according to HMRC rules. You cannot change that. However you can minimise issues by ensuring:

Your tax code is correct
Your P45 is accurate
HMRC knows when you left
You inform HMRC if your circumstances change

Holiday pay itself is not the problem. Incorrect tax codes usually are.

What If I Get Paid Holiday Pay Late or After Payroll Closes?

Your employer must tax it in the period it is paid not when it was earned. This could result in higher tax for that month although your overall annual position is unaffected.

Late holiday pay does not change your tax band unless your yearly income crosses a threshold.

Frequently Asked Questions

Is holiday pay taxable?
Yes. It is treated as normal earnings.

Does holiday pay increase my tax bill?
Only if your total income for the year crosses a tax band threshold.

Can I get taxed too much on holiday pay?
Yes temporarily although HMRC corrects it.

Do I need to do a Self Assessment?
No unless you are already required to complete one.

Do I need to tell HMRC separately?
Not usually. Your employer reports it automatically.

Conclusion

Receiving holiday pay after leaving a job is perfectly normal and does not cause long term tax problems. It is taxed like ordinary pay which sometimes leads to temporary overpayments, especially if you were on an emergency code or left work part way through the year. In my opinion most people worry simply because their final payslip shows a higher than usual tax deduction although HMRC will correct this by the end of the tax year.

If you think you have been overtaxed you can check your personal tax account, request a refund or simply wait for HMRC’s automatic year end review. Your holiday pay will not affect your long term pension, future tax bills or future employment. It is just part of your final taxable earnings for that year.