How does holiday pay work with an umbrella company?

Umbrella company employees have access to holiday pay, but it can be an area of confusion. This article will explain how holiday pay works through an umbrella company, including how it’s calculated and how it will be paid to employees.

How is holiday pay calculated?

As a result of the Harpur Trust versus Brazel case, the Supreme Court ruled that employees who work for part of the year are entitled to the same holiday as employees who work all year. Therefore, workers who work for part of the year should receive 5.6 weeks of annual leave. This judgement applies to employees and workers who work for part of the year under a permanent or continuous contract with irregular hours, such as seasonal workers, term-time only workers, bank staff, zero-hour contracts and workers engaged under recruitment agency or umbrella contracts.

To be consistent with this ruling and to ensure you receive the statutory benefits you are entitled to receive as an employee of an umbrella company, most compliant umbrella companies will calculate your holiday pay at a rate of 25%.

If you’re interested in finding out more about holiday pay, why not try the government’s holiday pay calculator? This could be ideal for those who have more complex working arrangements.

Holiday pay needs to be taken into account when negotiating an assignment rate

Umbrella company employees must consider holiday pay when negotiating a contract. Unlike permanent staff members, the holiday pay allocation is taken from the assignment rate that is agreed with the end-client or recruitment agency. This means that umbrella company employees will not receive a 25% uplift because the 25% is calculated from the assignment rate (the hourly or daily rate that the temporary worker has agreed to).

How is holiday pay processed for umbrella company employees?

Most umbrella companies will process holiday pay in two ways, and you usually get to choose which one you would prefer.

Option 1 is having holiday pay processed for each payment frequency. If you choose this, you’ll notice on your payslip that 25% of your payment is allocated as “holiday pay”, and you’ll receive this every time the umbrella company pays you. This option is the most preferred solution amongst umbrella company employees.

Option 2 allows umbrella company employees to accrue holiday pay and have it paid at a later date. This is preferable for those who don’t mind receiving less of their pay because they like the idea of having a lump sum paid to them at a later date. Accrued holiday pay is an excellent way of saving for a holiday or a rainy day.

Regardless of which option you prefer, holiday pay is always your money and should always be paid to you transparently. The press recently reported that an umbrella company had withheld accrued holiday pay and kept it for themselves. If this is true, it’s unethical and should be reported to HMRC immediately.

As specified in ‘Working through an umbrella company’, official guidance on the government’s website, if you leave an “umbrella company with annual leave owing to you, the company must pay you for it”.

Churchill Knight Umbrella processes holiday pay efficiently and compliantly. Our employees can choose whether they want holiday pay to be processed each payment frequency or accrued and paid in a lump sum later. It’s also easy to change your holiday pay preference if your circumstances change during your time with us.

Churchill Knight Umbrella

Founded by experts with over 20 years of industry experience, Churchill Knight Umbrella is one of the leading umbrella payroll providers in the UK. From the beginning, we’ve always been committed to compliance and customer service, and we’re proud to be an accredited member of the Freelance and Contractor Services Association (FCSA).

When you choose Churchill Knight Umbrella, you’ll get more than just a PAYE payroll service. Our employees can benefit from free insurance cover, employee rights, Same Day Faster Payments, access to our innovative portal and mobile app, and more!

To find out more about our umbrella service and request a free, tailored take-home pay calculation, please complete the short form here and give our friendly team a call on 01707 871622.

This article was updated on 31/10/2023.