Umbrella Company Holiday Pay
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Umbrella Companies. But how does umbrella company holiday pay work?
In this comprehensive guide, we delve deep into the heart of umbrella companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions and remain compliant.
Umbrella Company Holiday Pay
Contractors working through umbrella companies are employees and are therefore entitled to statutory holiday pay under the Working Time Regulations 1998.
In this relationship, the umbrella company provides a payroll service to the contractor; however, they don’t benefit from any work performed during the contract. As a result, umbrella companies cannot directly cover the holiday pay, which must come from the contractor’s earnings.
On an umbrella payslip, the amount shown as holiday pay is a reallocation of earnings. Employment costs are deducted from the assignment rate to get gross pay, and 12.07% of this is considered holiday pay.
Do Umbrella Companies Pay For Holidays?
The short answer to this is: no. While contractors working through umbrella companies are entitled to holiday pay, the holiday pay isn’t paid out of the umbrella company’s own money.
While the umbrella company manages the administration of apportioning holiday pay, the holiday pay itself is simply a reallocation of the contractor’s pay.
Similar to employment costs (employer’s NI, apprenticeship levy, etc.), holiday pay allocation is included within the assignment rate agreed upon with the fee-payer. Contractors will not receive an additional 12.07% uplift because the 12.07% is factored into the rate agreed upon during contract negotiations.
How Is Holiday Pay Calculated?
The 12.07% allocated to holiday pay is based on the European Working Time regulations, which state that employees are entitled to 5.6 weeks of holiday in a year or 28 days. Dividing 5.6 by 46.4 (the remaining weeks in the year) gives a rounded figure of 12.07%.
The holiday pay figure shown on your payslip will be 12.07% * gross pay.
To calculate gross pay, umbrella companies deduct statutory and non-statutory employment costs from the assignment income (the amount the fee payer is invoiced). These employment costs include:
- Employers’ National Insurance contributions (NICs);
- The Apprenticeship Levy;
- Employer’s Workplace Pension Contributions (if applicable); and
- The umbrella company’s margin.
How Do Umbrella Companies Pay Holiday Pay?
There are two methods by which umbrella company contractors can receive holiday pay:
i) Accrued (Saved)
The umbrella company sets your holiday pay aside until you take annual leave (or the contract finishes). You will receive payment from your accrued holiday pot when you take time off.
ii) Advanced
The umbrella company adds holiday pay to your weekly (or monthly) payslip. It means you are always up-to-date with your holiday pay entitlement.
Contractors usually prefer the advanced payment method to avoid leaving money owed to you in an accrual account with the umbrella company. If the umbrella company were to go bust, the holiday pay would be lost.
Is Holiday Pay Taxed?
Yes, holiday pay is a form of taxable income. It is, therefore, subject to statutory deductions such as Income Tax and NICs.