Umbrella company holiday pay: overview for contractors

As ContractorUK readers now know, there are numerous considerations for when IR35 reform leads limited company contractors to use an umbrella company, and one of those considerations getting air-time on the BBC this month was holiday pay as a brolly employee.

In short, while it may be another new area that formerly PSC contractors must suddenly familiarise themselves with due to moving structure thanks to next week's off-payroll rules, all employees of a PAYE umbrella must understand their annual paid leave rights, writes Joanne Harris, technical commercial manager at SJD Accountancy.

A statutory right

Annual leave (and subsequent pay) are statutory rights under the Working Time Regulations (WTR) 1998. When you work through any compliant umbrella company, you become an employee of that umbrella company and will receive a contract of employment, which must comply with the WTR. Put simply, this means you receive the same statutory rights and protections in law as any other employee, including the right to holiday pay.

Under the WTR, all employees are legally entitled to 5.6 weeks’ paid holiday a year (including bank holidays). For those who work five days per week, this amounts to 28 days annually.

Where your umbrella holiday pay comes from

The money to fund your holiday pay is included in the ‘assignment rate’ sent to the umbrella company by your agency or end-hirer. Alongside employer NI, Apprenticeship Levy, the umbrella company margin and, if appropriate, employer workplace pension contributions, this is one of the reasons why the assignment rate for working through an umbrella company is higher than the ‘PAYE rate.’

Currently across the contractor industry, there are two main methods for paying holiday pay.

Firstly, ‘paid in advance,’ where holiday pay is paid to you in advance of you taking leave, or ‘accrued,’ where the umbrella company withholds this element of pay and releases it to you when you take leave or actually go on holiday. Both methods have their merits.

Method 1: Holiday pay paid in advance

Umbrella employers using this method will pay holiday pay to you in advance of you taking leave.

This advancement should be explicitly shown on your payslip, so you know how much of each payment relates to your holiday pay.

This method allows you to manage holiday pay money yourself, but it means you should keep these funds to one side for when you do take leave.

Method 2: Accrued holiday pay

Under this method, you accrue holiday pay as per the terms of your contract of employment, and it is paid to you when you take a holiday.

This method can feel quite paternalistic. Indeed, freelancers and contractors who are used to managing their own business or finances are known to find this method frustrating.

However, for those transitioning into contracting from permanent work, the ‘accrued’  method can be reassuring.

Key considerations (to avoid nasty surprises)

Either way, remember, if you cease employment part-way through the holiday year and you have accrued holidays, you are entitled to payment in lieu of holiday, at the end of your employment.

Regardless of method though, it is important that you take your holidays during the holiday year. The timings of your holiday year will be set out in your employment contract. For example, your holiday year may run from January 1st to December 31st.

Holidays are important for your health and well-being and any responsible employer should encourage you to take this time off.

You should also be mindful that many employers, including umbrella employers operate a ‘use it or lose it’ policy, whereby if paid leave is not taken by the end of the holiday year, the holiday pay is not paid out. You should check your employment contract and your umbrella’s holiday policy to understand the approach to holiday pay that will be taken.

Holiday pay under furlough

The government is clear in its guidance for the ongoing Coronavirus Job Retention Scheme that employees will continue to accrue holidays as per their employment contract, and this applies equally to umbrella employees. Your right to holiday pay does not change while on furlough, as a statutory right is not something that you can be ‘contracted out’ of.  Put simply, during the time you were furloughed, you were accruing holiday entitlement and holiday pay, and no contractual rewrite can change this fact. 

Final thought - sort it before signing up

As with everything relating to umbrella company employment, and as the BBC’s Radio 4 programme of March 20th indicated, transparency is key. It is essential that you are aware of and understand how you will receive your holiday pay and that you are comfortable with these terms and policies -- prior to signing up with an umbrella employer.