A complete guide to your annual leave policy + Free Template

When it comes to writing an annual leave policy, there’s no one-size-fits-all solution.

But small businesses in particular are likely to experience the same stumbling blocks:

Lack of time - there are so many other things you need to focus on, so you can’t give a lot of time to annual leave policy research
Need for automation - the tasks associated with annual leave (inputting and updating leave data, responding to requests etc.) are cumbersome and error-prone
Need for clearer processes - you need an easily accessible, comprehensive and easy-to-understand annual leave policy for your team.

As a small business, you need to figure out what best suits the needs of your company and of your team in terms of annual leave, and be prepared to revisit or adjust your annual leave policy as you grow.

Deciding the purpose of your annual leave policy is essential, but at Charlie we understand how nuanced that can be. That's why we’ve put together this guide and included an annual leave policy template that you can download for free.

We’ve also created HR software that’s easy and straightforward to use and takes the hassle out of managing annual leave, which we’ll explain in more detail below.

But before we tell you about that, let’s make sure we understand what an annual leave policy is and what it needs to include.

What is an annual leave policy?

An annual leave policy sets out the amount of holiday every member of your team is entitled to each year, and outlines the process for requesting time off.

A good annual leave policy will help to ensure impartiality and consistency across the company and avoid internal conflict.

Your annual leave policy also gives employees something to refer to whenever they need it, answering the practical questions about taking and booking leave — for example, whether bank holidays are included in the holiday allowance.

Why does a small business need an annual leave policy?

A small business needs an annual leave policy to ensure that all employees are treated fairly and consistently. Your annual leave policy provides you with a framework for managing time off across your team effectively.

A clear and defined annual leave policy will prevent people from carrying over too much leave and ensure they take enough time away from work — vital for their mental and physical health, and productivity at work.

Which answers should your annual leave policy provide?

A good annual leave policy will answer the questions that managers and employees may have about practically using a holiday allowance. Questions like:

Are the bank holidays included?
What happens to any leave you don’t take?
What happens if you’re sick while on annual leave? (a sickness policy will also help with this)
How do you calculate holiday pay?
Can a leave request be declined?
Does annual leave need to be used or taken by a certain time?
Can you ‘cash in’ your leave?
What happens to your holiday allowance if you leave the company?
How much annual leave can be carried over to the following year?
How do you accrue annual leave?

Also, you can check out our attendance policy and birthday leave policy for more information.

8 sections you should always include in an annual leave policy

There are certain aspects your annual leave policy needs to cover, so we’ve broken them down into 8 sections. Including all of these will ensure your annual leave policy is both compliant and clear.

1 – Annual leave policy purpose and scope

First, you should state what the annual leave policy is for and who it applies to. This might seem obvious, but you must start off with this as an introduction.

This is also a good point to talk about the importance of having an annual leave policy and outline the sorts of time off it applies to: annual leave/holidays, bank holidays, pro-rata, etc.

If you use software like Charlie for managing your annual leave, you can set it up to include or exclude bank holidays and other types of leave in your team’s holiday entitlement.

2 – Holiday entitlement

Your team member's holiday entitlement comes next. This ensures your employees are aware of how many days off they can take per year, and means you don't have to include it in your employment contracts and avoid extra paperwork.

You can amend your annual leave policy and iterate as you go, and your contracts can simply refer to the section of the policy (or employee handbook).

3 – Annual leave requests process

Once you've covered the basics, you need to explain your annual leave request process so that all of your employees understand how to book their holidays.

Include the following information:

Who can approve holiday requests (line managers and other people responsible for operations and HR, for example)
How much notice your employees should give for a typical holiday request (this may also be dependant on how long they will be off for)
How many team members from the same team can be off at any one time (overlapping time off)
How many days off someone can take in a row (generally, no more than two weeks at a time)
Where they should send their requests (email, via a form, etc.)

That’s where HR software like Charlie comes in handy by completely automating all of the above: simply approve or reject with a click, and the system automatically calculates, updates and notifies.

4 – Company holiday year, carry-over leave, and leave in advance of accrual

Now into the detail. Your annual leave policy will need to cover:

Company holiday year – i.e. when your holiday year runs to and from. A lot of companies choose to make it simple and run from January to December, but others (like us at Charlie) align it with the tax year (April to March).
Carry-over leave – whether your employees can carry holidays into the next holiday year or not, and the maximum number of days they can carry over.
Leave in advance of accrual – for new starters or people wanting to take leave

Before they've accrued enough (for example, five days holiday when they've only accrued two days’ worth of leave), you'll need to confirm whether this can be done or not.

This is something that can be easily set up in your HR software as well, so you never have to think about it again – no manual adjustments needed, everything is done automatically and in one place.

5 – Bank holidays inclusion

In an annual leave policy, it’s common to include bank holidays as part of the entitlement/allowance.

In the UK for example, the minimum leave allowance is 28 days, but this can include eight bank holidays.

You’ll need to decide whether bank holidays are flexible or not — i.e. members of your team can take different days off instead. Generally speaking, it's best to make your annual leave policy as inclusive as possible, and you can find more information about creating a bank holiday policy for your business in our guide.

In Charlie, public holidays are automatically synced to your calendar, and you can decide whether they’re part of your holiday allowance or not. The system then produces annual leave reports based on your team’s data, so you can stay up to date with holiday use.

6 – Sickness during annual leave

No one wants to be ill during their holiday, but it can happen. An employee might, for example, become sick while they're on holiday.

Whatever the circumstances, your annual leave policy must help you stay consistent and apply the same rules to all of your team members so they understand whether:

the time off will be counted as holiday or sick leave
the rate they're paid at will be sick pay or holiday pay.

HR software like Charlie is a big help in situations like this, as it records all types of leave and resets allowances accordingly.

7 – Disciplinary consequences

Creating an annual leave policy takes a lot of work, so you don’t want it to be brushed off by your employees as vague guidelines.

To emphasise the importance of your annual leave policy and HR processes, you should think about communicating the potential disciplinary consequences for anyone who fails to comply with the policy.

This can include, but is not limited to:

Taking more time off than initially intended and not informing their line managers
Booking plane or train tickets before the holiday has been approved
Ignoring the notice period and booking holidays last minute
Booking holidays at a time the company does not allow for (for example, Black Friday in the retail sector when all hands are needed on deck).

8 – Termination of employment contract

It is also worth including a statement on what will happen to individual annual leave allowances when employment is terminated. And you’ll need to align this with your employment contracts.

When a team member decides to leave your company, you'll be able to give them two choices (or choose for them) during the offboarding process:

Allow them to take the remaining time off they've accrued during their notice period
Calculate any time off they're owed pro rata and add it to their last payslip.

This is another example of where using software like Charlie makes life as a small business owner so much easier, as it does all the calculations for you. Charlie’s free for 7 days, so you can see how simple and intuitive it is to use before you commit.

Free annual leave policy template

As you’ve probably now realised, there’s more to an annual leave policy than meets the eye.

And if you’re feeling daunted, you’re not alone!

We support hundreds of small businesses with their policy-making at Charlie, and there are very few founders and CEOs who feel confident about what exactly they should offer or how they should put it into practice.

For that reason, I’m including an annual leave policy template for UK small businesses with this blog.

Our annual leave policy template is downloadable and customisable, so that you can immediately put it into use. And it’s completely free.

Annual leave policy FAQs

What is the standard holiday policy in the UK? (statutory paid holiday)

By law in the UK, most employees are entitled to 5.6 weeks' (or 28 days’) statutory paid holiday, per year.

Including the bank holidays in the statutory holiday allowance is at your discretion as an employer — 28 days including or plus the bank holidays. Whatever you decide, it should be clearly outlined in both your annual leave policy and your employment contracts so that your employees know exactly what’s included in their statutory allowance.

What are the barriers for small businesses wanting to write an annual leave policy?

There are some common barriers for small businesses when it comes to managing annual leave and writing an annual leave policy.

Flexibility versus consistency

Balancing flexibility with the importance of consistent operations is a common challenge for small businesses. You need to strike a balance between accommodating individual employee needs and ensuring that your business can function. (Check out our hybrid working policy template for more information on this)

Employee satisfaction

Employee satisfaction is crucial. An annual leave policy that is perceived as too restrictive can cause dissatisfaction and ultimately impact employee retention. And a policy that’s too lenient may cause confusion and limit productivity.

Integration with other policies

Coordinating your annual leave policy with other HR policies (such as sick leave, remote working, or flexible scheduling) can be complex. Ensuring that your policies complement and support each other is essential for a positive workplace culture. And they all should be in line with the values outlined in your diversity and inclusion policy.

Technology limitations

Many small businesses don’t have advanced HR technology, which means all tasks and admin has to be done manually. This results in the increased likelihood of errors and makes it challenging to track and manage leave effectively.

Accrual and tracking

Managing the accrual of leave and tracking holidays is complex, especially in small teams that rely on manual processes. The admin is pretty much constant and errors in calculations are common.

Charlie is built for small businesses, and automates all essential HR tasks. It’s so simple to use that you and your team can use it without any training, and you can try it for free to see if you like it before you commit.

How should you manage annual leave?

Every small business is unique, with different staffing requirements throughout the year. Finding the right annual leave policy is not always straightforward, so you need to be prepared for some trial and error.

As a fellow small business, it took us a while to settle on an annual leave policy that suited Charlie. I’m going to share our learnings with you here, so that they might speed things up a little for you. Charlie exists to support other small businesses and an important part of that is knowledge sharing.

For our first three years, we offered ‘unlimited holiday’ to all our employees because we felt that extending this level of trust invited them to take ownership of the company's future. Unlimited holiday works for some of the big companies and sounds great in theory, but in practice, it just didn’t work at Charlie. And we felt that after three years we’d given it a pretty good shot!

Off the back of what we learned during our unlimited leave trial, we created our current holiday policy and we now offer every member of our team 25 days’ leave, plus the bank holidays. As part of this, we recommend that our employees take five days off work every quarter, but obviously we can’t enforce this.

Our current annual leave policy feels like a good fit for the business and our team, but as we’re always innovating we decided to roll out our 9-day fortnight in 2021. So in addition to our 25 days plus bank holidays, everyone at Charlie now has every other Friday off.

There are many reasons we moved to a 9-day fortnight, and we tracked and measured success over a trial period before making it a permanent policy.

Whatever you choose to do at your business, you need to make informed decisions about your annual leave policy. Knowing what you want to achieve, and the warning signs to look out for, is key.

Without enough planning and thought, managing annual leave is confusing, error-prone, and time-consuming. Keeping the purpose of the annual leave policy in mind at all times should help you to figure out what works best for you.

You want an annual leave policy that:

Enables you to easily respond to leave requests
Ensures you don’t give too many people the same day off
Helps you maintain an up-to-date holiday calendar
Encourages your employees to take enough time away from work
Helps you to keep track of when members of your team are on leave, and how much holiday allowance they have left.

Hopefully you’ve got enough now to put together your own annual leave policu - good luck!