For most contractors, Holiday Pay is an area that causes a lot of confusion when they register with an umbrella company. Our short blog explains what Holiday Pay means when you work through an umbrella company and how it is calculated.
One of the benefits of contracting is that you can take time off whenever you like – by delaying a contract start date or not accepting any new contracts during the time you want to take off.
However, taking time off as a contractor presents a gap in income. For contractors working through umbrella companies, this is where Holiday Pay can be useful.
If you decide to contract via an umbrella company, you are entitled to Holiday Pay. You can use this allocation to fund time off between contracts or for a holiday you have planned.
Similarly to employment costs, Holiday Pay is taken from the contract rate that your umbrella company receives from your recruitment agency or end-client.
Holiday Pay is never deducted from you (unless you wish to have it retained) it is simply a re-allocation of your money and this is why it is shown as a separate line on your payslip.
How is Holiday Pay calculated?
Since April 2009, all PAYE employees are entitled to 5.6 weeks paid holiday each year – this is worked out at 5.6 times the standard 5 day working week, permitting you to 28 days per year (including bank holidays). Most umbrella companies will usually work out Holiday Pay as 12.07% of your hourly rate.
The following calculation has been used to work out Holiday Pay:
5.6 weeks (the statutory minimum) divided by the number of weeks that are left over after the 5.6 weeks has been deducted (52-5.6=46.4 weeks).
5.6/46.4 weeks = 12.07% of your gross taxable pay.
If you only work for part of the year, your holiday allowance will be calculated on a pro-rata basis.
How will Holiday Pay be paid to you?
There are two ways in which you can have your Holiday Pay paid to you and most compliant umbrella companies will give you the option to pick. It is important to note that you will be no better or worse off by choosing one payment option over the other – exactly the same amount will be paid to you regardless of the payment method you choose.
Paid in advance
You can opt to have your Holiday Pay paid in advance – so you are always up-to-date with any entitlement owed. If you choose to be paid in advance your Holiday Pay will be paid alongside your salary each week/month.
If you choose to accrue Holiday Pay, it means that instead of having it paid along with your salary each week/month, it will be retained until you choose to have it paid to you as a lump sum. If you do not take time off and withdraw the money, it will be paid to you at the end of the financial year or when the period of employment has finished.
Why is Holiday Pay shown as a separate entity on my payslip?
Under the Working Time Regulations (WTR), Holiday Pay cannot be included as part of your basic pay. Compliant umbrella companies will list Holiday Pay as a separate line on your payslip.
As Holiday Pay is also listed on your payslip, it means you will always have a record to refer back to showing how much Holiday Pay you have received.
Take a look at our Ultimate Guide to Umbrella Companies for an example payslip and detailed explanation of the deductions you can expect.
Umbrella companies will never keep your Holiday Pay
Compliant umbrella companies will never keep your Holiday Pay for themselves. Holiday Pay is simply a re-allocation of your money and will never be deducted from you.
Using an umbrella company is the easiest way to get paid
Churchill Knight Umbrella provides payroll services for contractors and agency workers in the private and public sectors. Churchill Knight Umbrella removes the administration often associated with contracting as we take care of everything from set up and agency invoicing to deducting tax and getting you paid.
If you are looking for a reliable, trustworthy and ethical umbrella payroll service, speak to a member of our team today on 01707 871622. Alternatively, you can sign up to our umbrella service using our online registration form – it will only take a couple of minutes!