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.

Problems with umbrella companies and holiday pay

In recent years, it has come to light that a number of umbrella companies have made some serious money out of unclaimed holiday pay.

Some contractors receive holiday pay via the ‘accrued’ method – i.e. you claim it when you actually take time off. However, if you don’t claim the funds by the end of the tax year, the umbrella may simply keep the funds.

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.

As there is no legal definition of an ‘umbrella company’, nor a regulatory body to oversee the industry, the practice of withholding holiday is unscrupulous, and possibly unlawful.

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

What to look out for when looking for a new umbrella

So, what can you do if you’re looking for an umbrella provider?

  • Make sure the contract you have with the umbrella clearly states how holiday 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.
  • You can access a concise guide to holiday entitlement at the GOV.UK site.

About the Editor

  • James Leckie

    James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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Last updated: 9th May 2023