A Guide to Holiday Pay for Umbrella Contractors

A significant benefit of working through an employment umbrella company, like Danbro, is your entitlement to statutory payments. This includes things like sick pay, maternity and paternity pay, and holiday pay.

By law, the moment you become employed – be it full time, part-time, or even ‘zero-hours’ – you will start earning holiday pay.

There are two main methods by which you can receive your holiday pay as an umbrella contractor:

  • Saved / Accrued, whereby your employer sets aside your holiday pay entitlement until you actually take your annual leave (or when you leave the umbrella company).
  • Paid in Advance / Rolled Up. This gets added to your weekly / monthly payslip. This means you’re always up-to-date with your holiday pay entitlement. It’s the more common method adopted by UK umbrella companies.
Furthermore, under the Working Time Regulations (1998), when you take your annual leave, your holiday pay MUST be shown as a distinct entry on your payslip.

At Danbro, we’ll take care of all this for you.

1. Will I get holiday pay with Danbro?

Yes. As a Danbro umbrella employee, you’re entitled to 28 days’ holiday per year.

This amount is subject to change if your end client stipulates a higher number of holiday days. Your holiday pay will be clearly stated within your employment contract.

Contractors ought to be wary of ‘less compliant’ umbrella companies. Transparency is key when it comes to your holiday pay. After all, you’ve earned it.

Before you enter into a contract with an umbrella company, you need to make sure that they have in place a clear, transparent holiday pay structure. Always make sure you check the terms of your contract – and their company handbooks – carefully. This ensures that you’re aware of exactly how and when your statutory payments are made.

2. How is my holiday entitlement calculated?

  • As an umbrella contractor, you’re entitled to the statutory entitlement for annual leave from the 52-week calendar year. As discussed above, that is at least 28 days. This equates to approximately 5.6 working weeks, leaving you with a total working year of 46.4 weeks.

  • The statutory entitlement figure (5.6) is then divided by your total working year (46.4), leaving you with 12.07%.

  • So, in simple terms, for every hour you work you accrue an extra 7 minutes of holiday entitlement.

3. Danbro’s holiday pay

Unless you request that it is saved, your holiday pay’s included every single time you get paid. The exact amount of holiday pay will be clearly displayed on your payslip. As discussed, you might opt to set this amount aside or save it for any holiday/s you take – that’s your prerogative.

Note, though, that when you sign the terms and conditions of your employment with Danbro, you are agreeing that – as per Appendix 2 of your contract – you’re opting in to having your holiday pay advanced to you, or ‘rolled up’, each time you get paid.

You’re also entitled to request that, instead of having your holiday pay advanced, we make a provision for it and set it aside for payment at a later date. In this instance, you’d have a statement on the second page of your payslip showing your holiday pay balance.

You can then draw from this ‘pot’ as and when you go on holiday (and aren’t getting paid). To do this, contact your payroll team and request the appropriate amount of holiday pay to cover your period of annual leave.



4. How is my holiday pay calculated?

As you might expect with payment calculations, working out holiday pay can seem quite complex. But let’s try and simplify it.

Your pay is like a pie [insert favourite flavour here] and your holiday pay is a percentage of that pie. But, and here’s the complicated caveat, a few slices need removing before we work out what that percentage actually amounts to.

The initial amount is not yet ‘your money’. It’s Danbro’s income for the work completed. So, first things first:

  • We retain our margin for the cost of your employment
Next go some other slices:

  • Employer’s National Insurance
  • Employer’s pension contributions
and

The figure we’re left with is your Total Gross Pay (TGP). This is equal to your contracted rate (the original pie), minus the various deductions (slices) stipulated above. Your TGP then gets divided by 1.1207 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 (your TGP).

Back to our pie.

What happens next is, 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 take home wage to tuck into.

Be warned though, some umbrella companies have been known to eat your slice of holiday pay pie! Whether it’s through a ‘use it or lose it’ type ploy, or by not paying out a held balance when the umbrella contractor leaves the company. Hence the importance of compliance when it comes to choosing your umbrella provider.

5. How does it work in practice?

Here’s an example of how your holiday pay works within the context of other potential deductions. Please note, this example is as per the 2020/21 tax year.

Let’s say your contracted rate is £1000. That money then gets sent to Danbro, becoming Danbro’s income for the work completed.

Here’s what happens next:

  • £22 is retained to cover our margin
  • £94.90 gets deducted for Employer’s National Insurance
  • £22.10 is set aside for Employer’s Pension Contributions
  • And £4.28 goes towards the Apprenticeship Levy
At this stage your holiday pay stands at £92.27. This is then temporarily deducted, as per page 2 of your payslip.

In simple terms that’s:

  • 1000 (Contracted Rate)
    – 22.00 (Danbro’s Margin)
    – 94.90 (Employer’s National Insurance)
    – 22.10 (Employer’s Pension Contributions)
    – 4.28 (Apprenticeship Levy)
    = 856.72 (Total Gross Pay)
  • 856.72 (TGP)
    ÷ 1.1207 (Statutory Holiday Entitlement)
    = 764.45 (Gross Income)
  • 856.72 (TGP)
    – 764.45 (GI)
    = 92.27 (Holiday Pay)
As your holiday pay is subject to Tax and NICs, it gets fed back in (added as ‘your money’ on page 1 of your payslip). Therefore, this leaves your Total Gross Pay at: £856.72.

The following statutory deductions then apply:

  • £115.90 in Income Tax
  • £80.85 in Employee’s National Insurance
  • And £36.84 in Employee’s Pension Contributions
When all that’s taken care of, the remaining funds are then transferred to your bank account. So, you’ll have a net take-home wage of £623.13.

holiday pay illustration The example above shows what happens when your holiday pay gets rolled up. As you can see, the accrued amount has been fed back in to your weekly payslip, making sure you’re completely up to date with your holiday entitlement. This action is clearly displayed on your payslip.

On the other hand, if you want your pay to be saved, you’d have a statement on the second page of your payslip highlighting your accrued holiday pay balance. You can then draw from this balance as and when you go on holiday. Just contact your payroll team and request the appropriate amount to cover your holiday period.

6. Why does my holiday pay get taxed?

Holiday pay, along with bonuses and overtime pay, is a taxable income. It is therefore subject to statutory deductions. This includes Income Tax and National Insurance contributions (NICs).

7. Get in touch

To find out more about Danbro’s holiday pay, or our umbrella company more generally, click here. Or, contact our dedicated team today using the form below.
Please do not use this area to provide personal information

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