How Does Holiday Pay Work With An Umbrella Company?

As yet another national lockdown has eased the newly found freedom has yet again inspired the travel bug within many of us. Summer is traditionally the season in which contractors take a well-earned break – though there is much to be said for a last-minute Winter getaway also. 

One of the more common questions we’re asked about contracting lifestyle is whether you will be paid when you take annual leave. Well, the short version is that if you work via an umbrella company you are entitled to the same benefits of a standard employee, including holiday pay. One of the more common questions we’re asked about contracting lifestyle is whether you will be paid when you take annual leave. Well, the short version is that if you work via an umbrella company you are entitled to the same benefits of a standard employee, including holiday pay.

Since April 2009 the law has stated that PAYE employees are entitled to a minimum of 5.6 weeks of leave annually (inclusive of bank holidays), or in simplified terms 28 paid days.  Accruement of holidays commences the moment you start a job whether it’s full-time, part-time or a zero-hour contract. If you are a contractor employed by an umbrella company the holiday pay is calculated at 12.07% of your gross salary payment. This is formulated by 5.6 weeks divided by the remaining 46.4 weeks in the year. Your holiday pay is deducted from the contract rate that the umbrella receives from the recruitment agency or end client (not your hourly rate). Compliant umbrellas who understand their responsibilities in this arena will not deduct holiday pay from you, it is essentially a re-allocation of your own money. As you would imagine, for shorter-term contracts, your entitlement will be calculated pro-rata basis. 

When receiving holiday pay from an umbrella company there are different methods available – most will opt for the accrual method of payment. This is a preferred choice as it allows you more flexibility (one of the major draws to the contractor lifestyle). This method works for the most part as we understand that many of your contracts are short-term and that generally, you are content to fulfil these temporary assignments without a structured break. By doing this you’re able to utilize gaps between your assignment as holiday periods to re-charge your batteries. But there is the “paid in advance” method also, the final choice is yours to make – here’s the difference between the two:

The accrual method. 

• This is where we hold your accumulated holiday payment until you need/request it. This pot of money is then paid to you when you choose to take annual leave, your assignment has finished, or at the end of the financial year.

The “paid in advance” method. 

• You will receive a small percentage of your holiday pay within the weekly/monthly PAYE payments that you receive from us. This means that you will get your holiday payments in advance based on your hours worked in the payment period. If you decide to take holidays during your assignment you will not be entitled to an additional lump payment (as you would with the accrual method). With careful money management, this method can work well.   

Under the terms of the Working Time Regulations (WTR), holiday pay cannot be included in basic pay figures. Therefore, regardless of your chosen method, we will show any holiday pay claimed as a separate entry on your payslip. 

If you’re still unsure please do get in touch, our friendly customer service team are always on hand to help and offer advice.  

We hope you thoroughly enjoy your next break – we look forward to receiving our postcard!