Umbrella companies – what is holiday pay?

If you sign up to an umbrella provider (as your employer), you (as a contractor) are entitled to receive holiday pay. Here we work out what legal obligations your umbrella company has, and how holiday pay is calculated.

So, what is holiday pay, and how is it calculated?

As an umbrella company contractor, you are an employee of the umbrella company (the scheme provider).

As your employer, the umbrella company has certain legal obligations to protect its employees – and one of these duties is to ensure that you are paid when you take time off.

Since April 2009, all PAYE employees are entitled to 5.6 weeks paid holiday each year. This amounts to 28 days for umbrella contractors – 5.6 times the standard working week of 5 days = 28 days.

It is up to the employer whether or not bank and public holidays can be included within this 28-day limit.

If you work fewer days per week, or for six months out of the year, for example, your holiday pay entitlement will be calculated on a pro-rata basis.

Clearly, umbrella companies do not fund this holiday entitlement themselves – it is funded by you (the contractor).

The percentage typically used to work out holiday pay is 12.07% of your hourly rate.

This is 5.6 weeks (the statutory minimum) divided by the number of weeks left over (52 weeks – 5.6 weeks = 46.4 weeks).

5.6 / 46.4 weeks = 12.07%

How is holiday pay transferred to the employee?

Most umbrella companies accrue holiday pay and hold it aside until employees actually take time off, when the period of employment has finished, or at the end of the financial year. This is often calculated at 12.07% of the hourly rate, as detailed above.

Other PAYE umbrella schemes provide ‘rolled up’ holiday pay, which is paid each week or month to their employees.

Under the terms of the Working Time Regulations (WTR), holiday pay cannot be included in basic pay, so all umbrella companies are obliged to show each element of pay as a separate entry on each payslip.

You should ask your scheme administrator if you have any questions about how holiday pay is handled or about any other deductions shown on your payslip.

You can access a concise guide to holiday entitlement at the GOV.UK site.

Last updated: 1st June 2022