Statutory holiday entitlement that you've accrued but not taken must be paid out as cash on termination. It's not optional for the employer. Contractual holiday above the statutory minimum (some contracts give 25 or 28 days plus bank holidays) can sometimes be lost if the contract says so and you haven't taken it. The final pay packet should include the accrued holiday figure as a separate line.
Holiday entitlement in the UK is set by the Working Time Regulations 1998. The statutory minimum is 5.6 weeks per year, which for a full-time five-day worker is 28 days (and which usually includes bank holidays in the calculation). Section 14 of the Regulations requires that any unused statutory holiday at the point of termination must be paid out as cash. This is non-negotiable; the employer can't refuse and you can't waive it.
Accrual during your final partial year is pro-rated. If your annual entitlement is 28 days and you leave six months into the year, you've accrued 14 days for that year. Anything you've taken comes off the accrual; anything left is paid out. The maths is straightforward. The holiday entitlement calculator on this site handles the calculation including part-year and part-time scenarios.
Contractual holiday above the statutory minimum is treated differently. If your contract gives you 25 days plus 8 bank holidays (33 total), that's 5 days above the statutory minimum of 28. The contract can specify that any contractual days above the statutory minimum that you haven't taken by termination are lost, not paid out. Some contracts do this; many don't. Read the holiday clause specifically.
Bank holidays during your final pay period are a small but common source of confusion. If your annual entitlement includes bank holidays in the count, bank holidays falling during your notice or final week count against your accrual. If your entitlement is 28 days separate from bank holidays, bank holidays during the notice are extra paid days. Most UK office contracts include bank holidays in the count.
Employers sometimes require you to use accrued leave during your notice period rather than be paid out at the end. This is allowed if your contract gives them the right (most do), and it reduces the cash payout. From an employee perspective, you usually end up roughly equal: you spent some of the notice on leave at full pay instead of receiving the equivalent days as cash on top.
Tax on accrued holiday pay is straightforward: it's taxed as earnings under PAYE plus National Insurance, same as your salary. It appears as a separate line in your final pay packet but sits in the same tax category. There's no special treatment, no tax-free allowance, no different rate. The holiday pay value is calculated as days × your normal daily rate.
If your employer fails to pay accrued statutory holiday on termination, that's an unlawful deduction from wages. You can raise it as a grievance, escalate via ACAS early conciliation, then potentially a tribunal claim. The time limit is three months less one day from the date the holiday pay should have been received, so don't sit on it. Tribunal claims for holiday pay are common and well-established.
Practical recommendation: confirm your holiday balance with HR before your last week, request a written statement of accrued days and the value, check it against the holiday entitlement calculator. When the final pay arrives, check the holiday line matches the agreed figure. If it doesn't, query it the same day. Final-pay errors are usually easy to fix in the next payroll cycle.
General information about UK employment law. For your specific situation, contact ACAS or an employment-law solicitor.