When you register with an umbrella company, you are entitled to holiday pay, but it is often an area that causes a lot of confusion. Continue reading as we explain how holiday pay works through an umbrella company, including how it is calculated and paid to umbrella company employees.
An umbrella company is an intermediary that conducts PAYE payroll for temporary workers. In many cases, hirers and recruitment agencies do not want temporary workers on their internal payroll system. Running payroll is generally regarded as hard work, as there is a lot of legislation to follow, and it can be highly time-consuming. Therefore, umbrella companies are often seen as the answer because they take care of the payroll and associated administration.
Umbrella companies become the employer of temporary workers for payroll purposes, meaning temporary workers become umbrella employees. This allows temporary workers to gain access to employment rights, including statutory benefits and several additional perks.
If a role requires an umbrella for payroll purposes, the temporary worker will be asked to choose a provider. Often, recruitment agencies will have a pre-collated list of trusted umbrella companies for their candidates to use – referred to as a Preferred Supplier List (PSL).
Joining an umbrella company is less hassle than you may think. As they are the employer within the supply chain, contractors and freelancers must provide several pieces of personal information during the registration process. Required information includes full name, address, bank details, NI number, proof of identification, assignment information, and more. Once the temporary worker has provided the necessary information, the umbrella will welcome them to its service.
Getting paid by an umbrella company is pretty straightforward. Workers are required to work on their assignments as expected and then submit timesheets for the hours they’ve completed. Once complete, timesheets will need to be sent to the agency and the umbrella company. The umbrella company will then invoice the recruitment agency for the worker’s assignment rate. The agency will invoice the end-hirer (the company the worker is conducting tasks for as part of their assignment).
Once the umbrella company has received the assignment rate from the worker’s agency, they’ll start to process payroll. Firstly, the umbrella will deduct its margin. Then, the appropriate PAYE deductions are made and send to HMRC on the worker’s behalf – including tax and National Insurance. The employment costs are also deducted and consist of the Apprenticeship Levy and Employer’s Liability. If the worker is contributing towards a pension or is paying back a student loan, these deductions will be made by the umbrella company as well.
Holiday pay is also deducted, but the worker will have a choice to have it repaid immediately (12.07%) or accrued for payment at a later date. Umbrella company employees do not earn an additional 12.07% on top of their assignment rate. Instead, the 12.07% is deducted and then repaid from the assignment rate. Therefore, it’s essential umbrella employees consider holiday pay when negotiating the rate with their recruitment agency or directly with their client.
Finally, the worker is paid their net salary, supported with an umbrella company payslip.
It’s worth noting that the only income umbrella companies retain is the margin they deduct for processing payroll. Usually, umbrella company margins vary between £15 and £30 per week. The rest of the deductions are paid directly to HMRC (PAYE).