How does Holiday Pay work with an umbrella company?

Umbrella company holiday pay can confuse contractors and freelancers, and this doesn’t surprise us. Umbrella company holiday pay is slightly unusual, but don’t worry – it’s not as confusing as you think. Whether you’re new to contracting, unsure how umbrella companies work, or just want a friendly reminder – we’ll summarise umbrella company holiday pay for you.

What is Umbrella Company Holiday Pay?

If you work on temporary assignments and get paid by an umbrella company, one of the many things you’ll see on your payslip is Holiday Pay. Because the umbrella company is your employer, they legally need to show this on your payslip (12.07%).

The umbrella company is not giving you an increase in your assignment rate of 12.07% as a “bonus”. Nor are they taking 12.07% of your hard-earned pay for themselves. What they are doing is reallocating 12.07% of your assignment rate as Holiday Pay. You are no better or worse off. Let us explain this a bit more thoroughly.

It’s a legal requirement for umbrella companies to show Holiday Pay on your payslip. As an umbrella company employee, it’s really important that you understand that umbrella company Holiday Pay is a reallocation from your assignment rate. This means the rate you agree for an assignment with your agency or client (assignment rate) must take into account any money you wish to put aside for holidays throughout the duration of the contract. And, don’t forget the employment costs too (Employer’s National Insurance Contributions and the Apprenticeship Levy). Your assignment rate should take these into account as well.

To get a better understanding of the deductions that will be made to your assignment rate when working through an umbrella company, you should always be provided with a Key Information Document before committing to a role. A Key Information Document will show all the deductions that’ll be made to your assignment rate, and will give you an accurate indication of what you should expect to retain as your net salary. Remember, the employment costs and Holiday Pay should be taken into account when agreeing on the assignment rate.

Thankfully, we’ve noticed a number of agencies and end-clients already offering uplifts for temporary workers who need to use an umbrella company. We hope this good practice continues!

For more information on how umbrella companies work, please visit our Umbrella Companies Explained guide. We also have a series of Umbrella Company FAQs that may be helpful.

How is Umbrella Company Holiday Pay calculated?

Since April 2019, all PAYE employees are entitled to 5.6 weeks paid holiday each year (28 days, including bank holidays). Most providers will usually work out Umbrella company holiday pay as 12.07% of your gross taxable income.

Here’s an example of how holiday pay is calculated:

The 5.6 weeks of statutory holiday entitlement is divided by the number of working weeks left over after the 5.6 is deducted

55 – 5.6 = 46.4 weeks

5.6 ÷ 46.4 = 12.07%

If you only work for part of the year, your umbrella company will calculate your holiday allowance on a pro-rate basis.

How is your Umbrella Company Holiday Pay paid to you?

There are two ways you can choose to have your umbrella company holiday pay paid to you, and you should always be given this option when you register with an umbrella. It doesn’t matter which option you choose, and you will receive the same amount regardless.

Accrued

If you choose to have your holiday pay accrued, your umbrella company will put your money into your own ‘holiday pot’. They will not touch this money, and it will sit there until you choose to have it paid to you in a lump sum at a later date.

Accruing holiday pay is particularly useful if you have an upcoming gap in between contracts, or you are off on holiday and would like to use it as income while you are away.

Advanced

The other option is to have your umbrella company holiday pay advanced. When you choose to have, it advanced your entitlement will be paid alongside your weekly or monthly salary, and there will be no outstanding payments due.

Umbrella Company Holiday Pay is your money

Please remember it is your money, and it is your choice how you have it paid to you. A compliant umbrella company will never keep your holiday pay for themselves.

Need to speak with an expert?

If you’re interested in finding out more about umbrella companies, why not request a call back from one of our top 10 umbrella companies? They are on hand to speak with you about your circumstances and would be delighted to clear up any uncertainties you may have about umbrella companies and your pay. And there is absolutely no obligation whatsoever to use their services once you’ve spoken with them! Request a call back now by clicking here, or contact one of our top 10 umbrella companies directly.

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