Annual leave loading is one of the most misunderstood employee entitlements in Australia. Many SME owners don't know it exists, don't know who's entitled, or don't know how to calculate it. Getting it wrong means underpaying your staff — and in 2026, that carries serious penalties.
1. What Is Leave Loading?
Annual leave loading is an extra payment of 17.5% on top of the employee's base rate of pay when they take annual leave. It was originally designed to compensate employees who regularly earned overtime, shift penalties, or commissions — money they would "lose" while on leave.
2. Who Gets It?
Leave loading entitlements depend on the applicable Modern Award or enterprise agreement:
- Most Modern Awards include a 17.5% annual leave loading provision.
- Enterprise agreements may specify a different amount or exclude it.
- Award-free employees (managers, professionals above the award) — check their employment contract. If it's silent on leave loading, there's generally no entitlement.
- Casuals — not entitled (they don't accrue annual leave).
3. How to Calculate It
The loading is calculated on the employee's ordinary base rate — not including overtime, penalties, or allowances.
Example: An employee's base rate is $30/hour, working 38 hours/week.
- Weekly base pay: 38 × $30 = $1,140
- Leave loading: $1,140 × 17.5% = $199.50
- Total for 1 week of leave: $1,140 + $199.50 = $1,339.50
4. When Is It Paid?
Most awards allow two approaches:
- When leave is taken: The loading is added to each leave payment as the employee takes holidays throughout the year.
- Annual lump sum: Some businesses pay the loading as a lump sum in December (before the Christmas break). Check your award — not all allow this.
5. Leave Loading on Termination
When an employee leaves, you must pay out their accrued but untaken annual leave. Whether leave loading applies to this payout depends on:
- The specific wording of the applicable award or agreement.
- Most awards require leave loading on termination payouts — but some don't. Check yours carefully.
6. Payroll Software Setup
In Xero Payroll:
- Create a "Leave Loading" pay item linked to the Annual Leave category.
- Set the rate to 17.5% of the base hourly rate.
- Configure it to automatically calculate when processing annual leave in a pay run.
We set this up for all clients during payroll onboarding to ensure it's never missed.
Key Takeaways
- Annual leave loading is 17.5% extra on the base rate during annual leave.
- Most Modern Awards include it — check yours to confirm.
- Casuals and award-free employees may not be entitled.
- Check whether loading applies to leave payouts on termination.
- Set up a dedicated leave loading pay item in your payroll software.