Umbrella companies and holiday pay – how is it calculated?

If you decide to contract via an umbrella company, you will be entitled to receive holiday pay (as an employee of the company). Here we look at what holiday pay is, and how it is calculated.

What does the law say?

The vast majority of workers are entitled to ‘statutory leave entitlement’ or ‘annual leave’ equal to 5.6 weeks per year.

This is equivalent to 28 paid holiday days per year and is codified in the Working Time Regulations.

You start accruing holiday from the moment you start a job – whether it’s full time (as is the case for contractors), part-time, and even if you’re on a zero-hours contract.

You can still accrue holiday entitlement if you’re on sick, paternity or maternity leave.

Interestingly, bank holidays do not have to be given as paid leave – they can be included in a worker’s statutory leave entitlement.

Of course, although unlikely in the case of the contracting industry, your employer may decide to provide you with more than 28 days leave per year.

How is holiday pay calculated?

To work out how much holiday pay an employee is entitled to, your umbrella company will multiply your gross taxable pay by 12.07%

This percentage is worked out as follows:

5.6 weeks ÷ 46.4 weeks = 0.12069 (which is rounded up to 12.07%)

You can try the Government’s holiday pay calculator here – useful if you have a non-traditional working pattern.

When will I receive holiday pay?

There are two ways your holiday pay is paid to umbrella company employees – the first is via an accrual method, and the other is via a fixed, advanced payment.

The money used to fund your holiday pay is contained within your assignment rate – the sum of money transferred to your umbrella – which also contains your employment costs (such as Employers’ NI).

Accrual payment method

With the accrual method, your provider will keep your holiday pay entitlement aside until you actually take time off, or you stop working via the umbrella company.

The only problem with this method is that should you fail to make a claim during the holiday year, then you may lose any entitlement you have built up over time.

Unfortunately, some umbrella companies take advantage of this – and will pocket any holiday leave entitlement which remains unclaimed by contractors at year-end.

For this reason, you should always be aware of how much accrued holiday you have at any one and not rely on your umbrella company to remind you.

Advanced (‘rolled up’) payment method

Alternatively, you will receive holiday pay every time you are paid – every week or month – so that you are always up-to-date with any holiday entitlement you are owed.

This ‘advanced’ or ‘rolled up’ method appears to be the most often used by contractor umbrella companies.

Using this method, you won’t actually get paid when you take time off, as you have been continuously paid in advance.

Make sure your umbrella company has a transparent holiday pay policy, so you know exactly how and when your statutory leave payments will be made.

Read more about changes to the use of rolled-up holiday pay from January 2024.

Where can I see a record of my holiday pay?

All umbrella companies must include your holiday pay as a separate entry on your payslip. The method by which you receive your holiday pay should also be clearly explained in your contract.

You can see a typical payslip here.

Importantly, you should remember that holiday pay is your money – it is simply managed by your umbrella company and paid to you via one of the methods outlined in this article.

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