Explained: Holiday pay when you work through an umbrella company

08 December 2021
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They say working for an umbrella company is the same as any other employment. Well, yes and no, it is the same in some aspects, but in others, it can be a little different. One aspect of umbrella employment that often is the subject of confusion is holiday pay. You are right to think that, as with any job, you have the same holiday entitlement as any other employee in the UK, but the way it is paid out can be quite different.

This is due to the nature of the typical working arrangement and irregular work periods, typical to an umbrella employee.

How much holiday are umbrella employees entitled to?

The calculation is based on the European Working Time regulations, which states that employees are entitled to 5.6 weeks of holiday in a year or 28 days. We arrive at the percentage to calculate annual leave by dividing 5.6 by 46.4 (the remaining week in the year) to get a rounded-up figure of 12.07%. This percentage figure comes in handy when we get to negotiating an assignment rate.

Holiday pay and contract rates

As opposed to permanent employees, umbrella workers’ holiday pay is taken from the agreed assignment rate, so there is no 12.07% uplift on their pay because it is actually a part of their pay. In other words, payment in respect of annual paid leave will generally be made out of your annual paid leave reserve fund, which accrues at the rate of 12.07% of your Total Gross Pay.

To arrive at your total gross pay, you need to do the following calculation:

Your Contracted Rate – Umbrella Margin – Employer’s National Insurance – Employee’s National Insurance – Apprenticeship Levy = Total Gross Pay

You can use our online calculator to work this out or you can call us for a pay illustration on 0117 311 9800.

How do umbrella companies process holiday pay?

Typically, umbrella workers are presented with two options when deciding how to receive their holiday pay, which is no different with us here at SmartWork. Our employment contract legally states that the holiday pay is accrued and paid when the holiday is taken. However, it’s an option rather than an obligation.

If you don’t mind being paid a little less each week or month, you’ll be rewarded with a lump sum amount at a later day. You could treat this as a “holiday pot”, helping you put money aside for that dream holiday.

The other option “Advanced Holiday Pay” pays out the appropriate proportion of your holiday pay in each payment frequency (week or month). Your payslip will include the “Holiday Pay” line,  and it is paid out to date, which means you are never behind, and when you leave your umbrella provider, there is no accrued amount.

Usually, you can select which option you would prefer when you register with your umbrella provider.

What to look out for

Shady umbrella companies recently made the news for withholding and keeping contractors’ holiday pay, so it is crucial that you only deal with a compliant umbrella provider. The most prominent regulatory body in the umbrella sector is the Freelance and Contractor Services Association (FCSA), so any member would be considered a safe and compliant company to work with.

About SmartWork

SmartWork has been a member of FCSA since 2015 and goes through its rigorous audit every year to ensure compliance and retain the highest customer service standards. Our contractors receive the full range of statutory benefits and holiday pay (through any of the two options above).

Our contractors love us for our dedicated business managers’ personal approach, so why not give them a call and see how we can help you in your contracting journey. Our number is 0800 434 8446, or feel free to send us a message at info@smartwork.com.

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