Deciding to work with an umbrella company brings a range of benefits to contractors, one of which is holiday pay. Although it is an entitlement provided by all upstanding umbrella companies, it can be quite confusing for many contractors that are starting out. This article aims to explain what it is and how it works to make those first steps into contracting that bit easier.
One of the major draws to working as a contractor is the freedom that comes with it. One of the most notable being the freedom to take time off as and when you like. That said, taking time off does have its downsides, namely that it presents a loss of income. For contractors using an umbrella company, access to umbrella company holiday pay can bridge this income gap. Letting you get on with enjoying some time off rather than worrying about your earnings.
Umbrella company holiday pay is an entitlement afforded to contractors when they sign up. Meaning it will be a constant regardless of the specific company chosen. As with other costs, it is taken from the pay your umbrella company receives from your clients. However, it remains as your money. In short, it is a fund made up from a percentage of your contract pay, which is paid back to you in a way that best suits your needs. Umbrella companies will never deduct this money from you unless you specifically want them to retain it. It is shown as its own separate entity on your payslip as it is different from your salary.
According to the UK Government, employees are entitled to 5.6 weeks of paid holiday time per year, with each week being a five-day working week. This works out to be 28 days per year, including bank holidays. Working with an umbrella company, holiday pay for contractors is typically calculated as 12.07% of the hourly rate. This percentage is reached by taking the 5.6 week statutory minimum leave time, divided by the remaining number of weeks, which is 46.4.
Of course, this calculation will only apply if you work the full year, minus leave time. For contractors that work for a portion of the year, your umbrella company will calculate your holiday pay proportionate to the time you work.
You can receive your holiday pay in one of two ways, with most reputable umbrella companies leaving the choice down to you. Don’t worry about making a “wrong decision,” though, as regardless of what you pick, you will be paid the exact same amount all in all. The question is really down to what is most convenient for you.
The first option open to contractors is to accrue holiday pay. This means that unlike the second option, holiday pay will be retained by the umbrella company until the contractor chooses to have it paid in the form of a lump sum. Should no time be taken off, or the money not be withdrawn, then it will be paid out at the end of the financial year or when employment with the company ends, whichever comes first.
The second option is to have your holiday pay immediately. With this option, you will receive your holiday pay every week or month, separate from your salary. This can be a good choice for contractors that prefer to have any entitlements owed squared away.
Due to the Working Time Regulations, umbrella companies are unable to combine holiday pay with your basic pay. As such, good umbrella companies will opt to display your holiday pay separate from your salary on your payslip. This can be useful as it provides a quick and easy record of all the holiday pay you have received.
Hopefully, this article has answered any questions you may have about umbrella company holiday pay. However, if we missed something or want a bit more clarification, please don’t hesitate to contact us at Umbrella Options.