Umbrella companies – what is holiday pay?

All umbrella company employees 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.

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 out 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 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 paid to the employee?

Under the terms of the Working Time Regulations (WTR), holiday pay cannot be 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 – this means that holiday pay entitlement is paid each week or month.

Until recently, this method of pay was ‘unlawful’ despite being widely used.

However, since January 2024, this type of holiday pay method is now officially recognised. See this government explanation.

Problems with umbrella companies and holiday pay

In recent years, a number of umbrella companies have made some serious money out of unclaimed holiday pay.

As we mentioned above, if your umbrella uses the accrued method of holiday pay, they may be able to keep 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.

The practice of withholding holiday pay is unscrupulous and possibly unlawful.

Unfortunately, there is no legal definition of an ‘umbrella company’, nor a regulatory body to oversee the industry.

Umbrellas should be transparent about their holiday policy, and make it very clear what the deadlines are to claim holiday pay.

How to protect yourself against holiday pay skimming

So what can you do to make sure you receive your full holiday pay entitlement?

  • Make sure the contract you have with the umbrella 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 do use the accrued method, make sure you know exactly when the deadlines are.
  • 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 single payslip you receive is audited – and proves that any deductions made from your pay are as they should be.
  • You can access a concise guide to holiday entitlement at the GOV.UK site.

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Last updated: 4th March 2024