All umbrella company employees are entitled to receive holiday pay. Here, we outline the legal obligations of your umbrella company 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.
Your 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.
All PAYE employees are entitled to 5.6 weeks of 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 of the year, for example, your holiday pay entitlement is calculated on a pro rata basis.
Importantly, umbrella companies do not fund this holiday entitlement; 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 paid to the employee?
Under the Working Time Regulations (WTR), holiday pay is not included in basic pay.
This means that each element of pay must have a separate entry on every payslip.
Umbrellas transfer holiday pay to their employees via two main methods: accrued or rolled up.
Accrued method
Some umbrella companies accrue holiday pay and hold it aside until employees take time off, when the period of employment has finished or at the end of the financial year.
One significant downside of this method is that umbrella companies can simply retain any funds if contractors don’t claim holiday pay within a pre-defined period. More on this later in the article.
Rolled up method
Other PAYE umbrella providers pay their employees via the rolled-up method, which means holiday pay entitlement is paid weekly or monthly.
Until recently, this method of pay was ‘unlawful’ despite being widely used.
However, since January 2024, this holiday pay method has been officially recognised. See this government explanation.
Problems with umbrella companies and holiday pay
In recent years, a number of umbrella companies have made significant profits from unclaimed holiday pay.
As noted above, if your umbrella uses the accrued method for holiday pay, it may retain any unclaimed funds at the end of the tax year.
Some umbrellas won’t let you carry over any unused holiday pay to the next tax year, or make it difficult for you to do so.
Withholding holiday pay is unscrupulous and may be unlawful.
Unfortunately, there is no legal definition of an ‘umbrella company’ and no regulatory body overseeing the industry (although the government is expected to regulate it by 2027).
Umbrellas should be transparent about their holiday policy and clearly state the deadlines for claiming holiday pay.
How to protect yourself against holiday pay skimming
What can you do to ensure you receive your full holiday pay entitlement?
- Make sure the umbrella contract clearly states how holiday pay is handled.
- If you can, don’t choose the ‘accrued’ model. Instead, the rolled up method means you will receive your holiday pay each payment cycle.
- If you use the accrued method, ensure you know the exact deadlines.
- 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.
- More and more providers use payroll auditing software, such as SafeRec. This ensures that every payslip you receive is audited and proves that any deductions from your pay are as they should be.
- You can access a concise guide to holiday entitlement at the GOV.UK site.
Churchill Knight Umbrella
