Since British people use the word holiday for vacation, how do they differentiate a holiday like Christmas from a vacation holiday? Very very easily. I am going on holiday vs it's Christmas next week.
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In the US and most of Canada the term 'vacation' means taking earned time off from work to take a trip. In the UK, Australia, and most other English-speaking countries, people say 'holiday' to describe a going away from home for a period of leisure.
The use of the term holiday instead of vacation is a long-standing tradition in Europe that dates back hundreds of years. In ancient times, the holiday season was a time when people could take a break from their daily lives and enjoy time with family, travel, and leisure activities.