Our guide to umbrella holiday pay explains your entitlements to umbrella company holiday pay as an umbrella company contractor.
Unsure of how a contractor’s holiday pay is calculated or how much you will receive? We’ll explain all of this so you can understand everything you need to know about your umbrella company holiday pay.
Are contractors working with umbrella companies entitled to holiday pay?
Yes. One of the benefits of being an umbrella employee is the entitlement to holiday pay. According to law, once you’re employed—whether full-time, part-time, or on a zero-hours contract—you begin accumulating holiday pay. As an umbrella employee, you will be entitled to 28 days’ holiday (or ‘annual leave’) each year. Please note that this amount may vary if your end client specifies a greater number of holiday days. The details of your umbrella company holiday pay will be clearly outlined in your employment contract.
What is the process for receiving holiday pay through an umbrella company?
With Trafalgar Umbrella, your holiday pay is calculated within each payment and can either be advanced to you every time you get paid, or saved / accrued for you to take out at a later date. The exact amount will always be clearly displayed on your weekly/monthly payslip.
What is the annual leave entitlement for contractors?
You will be entitled to the statutory entitlement for annual leave from the 52-week calendar year. This means, you will be entitled to at least 28 days of umbrella company holiday pay. That being the case, approximately 5.6 out of the 52 working weeks will be classed as paid holiday, leaving you with 46.4 weeks of work.
Your holiday entitlement is worked out by dividing the statutory amount of holiday entitlement (5.6 weeks) by your total working year (46.4), which comes to 12.07 of your gross pay.
Therefore, for every hour you work, you earn approximately 7 minutes of holiday entitlement.
How do umbrella companies handle holiday payments?
Imagine your pay as a cake, and your contractor holiday pay is a portion of that cake. However, before we can determine the exact size of your portion, a few pieces need to be taken out to account for other factors. Let us explain…
Firstly, the initial ‘contracted’ amount, is not yet ‘your money’. The umbrella company receive it as their income for the work completed.
A margin is retained for the cost of your employment. Employer’s national insurance, Apprenticeship Levy and employer’s pension contributions are then deducted.
Your Total Gross Pay (TGP) is then divided by 1.1207 (see annual leave entitlement) to calculate your Gross Income (GI).
Your holiday pay is the difference between the amount you’re then left with (your GI) and the figure you had before. So, Gross Income (with holiday pay) – Gross Income (before holiday pay).
Next, your holiday pay portion gets added back on to your GI, to give you your TGP once again.
Your TGP is then subject to Income Tax, Employee’s National Insurance, and Employee’s pension contributions before you get a net take-home wage to tuck into.
How can I calculate my holiday pay when working through an umbrella company?
Here’s an example of how your umbrella holiday pay is calculated and advanced back to you by your umbrella company, taking into account other potential deductions. Please note, this example is based on the 2024/25 tax year.
Let’s say you have a contracted rate of £7,275.00 per month, which your umbrella company receives as income for your work.
Here’s what happens next:
- Deductions:
- £100.00 for the umbrella company’s margin
- £755.06 for Employer’s National Insurance
- £31.14 for the Apprenticeship Levy
- £159.33 in Employer’s Pension Contributions
- At this stage, your total gross pay (TGP) is £ 6,229.47 after these deductions.
- Holiday Pay Calculation: Your holiday pay is 12.07% of your gross pay. Here’s how it’s calculated:
- £6,229.47 (TGP) ÷ 1.1207 = £ 5,558.55 (your gross income after holiday pay is deducted)
- £6,229.47 (TGP) – £5,558.55 = £670.92 (holiday pay)
- Your holiday pay is deducted temporarily and will be added back to your pay on your payslip.
- Final Deductions: After your holiday pay is fed back in, your TGP remains £6,229.47, and the following statutory deductions apply:
- £1,444.06 in Income Tax
- £292.09 in Employee’s National Insurance
- Take-Home Pay: After all deductions, your net take-home pay is £4,493.32.
Why is my holiday pay taxed?
As holiday pay is bundled into your overall earnings, it is subject to statutory deductions like the rest of your salary. Bonuses and overtime payments would also be subject to statutory tax deductions.
Do umbrella companies take unfair advantage of contractors?
When choosing an umbrella company, it is important to ensure they have a clear and transparent holiday structure. Therefore, make sure you check the company handbooks and check the terms of the contract before signing. Accreditations and reputation are important when selecting a compliant umbrella company.
Under the Working Time Regulations (1998), your holiday pay must appear as a separate entry on your payslip when you take annual leave. With Trafalgar Umbrella, we take care all of this for you, so you don’t have to.
If you have any further questions about umbrella company holiday pay, then please reach out and speak to us.