How to set up employees' time off in Xero Payroll

To set up time off in Xero Payroll, first create your leave pay items in Payroll Settings, then assign a leave type to each employee under Payroll > Employees > [employee] > Leave, choosing a calculation method and entering their entitlement in hours (Xero works in hours, not days). For salaried staff, convert their annual allowance to hours (25 days at 7.5 hours a day = 187.5 hours). For irregular-hours and part-year workers, use a percentage method set to 12.07% of hours worked, which is the UK statutory rate for leave years starting on or after 1 April 2024.

The rest of this guide walks through each step, the numbers you’ll need, and how the new irregular-hours rules map onto Xero.

The single most useful thing to know is that Xero Payroll tracks leave in hours, not days. So whenever you’re entering an allowance, you multiply the holiday allowance by the number of hours in one working day.

A quick reference for a common allowance:

• 25 days holiday in hours at 7.5 hours per day = 187.5 hours
• 25 days at 8 hours per day = 200 hours
• Full-time hours in a year at 37.5 hours per week ≈ 1,950 hours

Get the hours-per-day figure right for each person and the rest of the setup follows naturally.

Before you can assign leave to anyone, the leave types need to exist in your settings.

Go to Payroll Settings > Pay Items > Leave and check that the leave types you need are listed (for example Holiday, Sick Leave, and any statutory types such as SMP or SPP). If a type is missing, create a new leave pay item.

Once the pay items exist, add the entitlement to each person.

Go to Payroll > Employees, select the relevant employee, then open the Leave section and add a leave type. You’ll then set:

1. Leave type – the type that applies to this employee (Holiday, Sick Leave, and so on).
2. Calculation method – how Xero accrues the entitlement. This is the key choice, and it differs between regular and irregular-hours staff (see the two sections below).
3. Hours accrued annually – for a fixed entitlement, the total hours per year. For 25 days at 7.5 hours a day, enter 187.5.
4. Opening balance – the hours already owed to the employee at the point you start tracking in Xero. If they’ve already taken some of this year’s holiday, deduct it: take the annual hours, subtract holiday already booked, and enter the difference.

That covers the core of holiday tracking in Xero once the numbers are in.

Choosing the accrual schedule

For a fixed annual entitlement, Xero lets you decide when hours are credited:

• Beginning of the calendar year – the full allowance is assigned annually.
• On the anniversary date – hours accrue on the anniversary of the employee’s start date.
• Each pay period – hours build up gradually across the year.

The simplest approach for most salaried staff is to accrue by calendar (leave) year, so the whole allowance is available from day one of the year.

This is the part of the old process that has changed, and it matters. For irregular-hours and part-year workers, zero-hours staff, casual workers, term-time-only employees, you can no longer just estimate a fixed number of days.

For leave years beginning on or after 1 April 2024, holiday for these workers accrues at 12.07% of the hours they actually work in each pay period. That figure comes from the statutory 5.6 weeks of paid leave: 5.6 weeks of holiday divided by the 46.4 working weeks in a year works out at 12.07%.

In practice, if someone works 70 hours in a month, they accrue roughly 8.45 hours of holiday that month (70 × 12.07%). It builds up pay period by pay period rather than being set once a year.

To reflect this in Xero, assign the holiday leave type using a percentage-based calculation method and set the rate to 12.07% (rather than entering a fixed annual hours figure). If your contracts offer more than the statutory minimum, the percentage goes up accordingly.

Getting the right method against the right person is exactly the kind of setup detail we handle for clients as part of our tools and technology support, payroll systems only save time when they’re configured correctly from the start.

To cut down the admin, Xero lets employees request their own leave and see their balances through Xero Me (the employee portal). Go to Payroll > Employees, select the relevant people and invite them to the portal.

Approved requests flow through to the pay run, and everyone can see the same Xero leave calendar, which keeps holiday tracking visible across the team.

Setting up entitlement and paying it are two different steps. Once leave is assigned, you record time taken during the relevant pay run: add the leave against the employee for the dates booked, and Xero reduces their balance and calculates the pay automatically based on the leave type and their pay rate. Always check the leave balance and the payslip before you finalise the pay run.

If you’d rather your payroll just worked, correctly, and without the guesswork on rules like the 12.07% accrual, our outsourced finance team can set it up and run it for you. Call FD Works on 01454 300 999 or email [email protected].