Some umbrella companies could still be pocketing holiday pay. Here’s how to get it back by Christmas
A source has told The Freelance Informer how some umbrella companies could still be systematically withholding and pocketing holiday pay from contractors and temp workers, potentially affecting thousands, especially supply teachers. However, if existing and former umbrella workers claim unused holiday pay they could be quids in by Christmas, said the source.
How the Scheme Works
Umbrella companies act as intermediaries between agencies and workers, handling payroll, tax, and National Insurance contributions. Workers, encouraged by some agencies or the umbrella companies themselves, are led to believe their holiday pay is being accrued for future use. However, when workers move between agencies or leave the umbrella company, there have been cases when this accrued pay has not been paid out as it should be.
This practice has been particularly prevalent in the teaching sector where temporary teachers and teaching assistants often move between schools and agencies, according to a source in the contractor recruitment sector who wishes to remain anonymous.
Supply teachers, for example, especially straight out of university are likely to be unaware of their rights or how the system works, and will or have lost out on significant sums of money. According to the source, some umbrella directors bank on the majority of temp workers not claiming their holiday pay. Some contractors are savvy and demand their holiday pay, but they are among the minority.
The source also said some recruitment agencies have pressured recent teaching graduates to join certain umbrella companies. The sales teams of certain umbrella companies could “mislead” these teachers about their holiday pay. “Instead of explaining they had the option to receive holiday pay with each paycheck, they were encouraged to accrue it,” said the source.
In one instance, the recruitment specialist said in some cases contracts will state the teacher contractors are eligible for holiday pay, however, a sales team would imply the contractor could only access it as a lump sum when taking a holiday. This can lead to a significant amount of unclaimed holiday pay accumulating – around £2.5 million in one case the source is aware of.
Some teachers frequently switch between agencies, however, most remain loyal to their umbrella. Especially, if they are advised to stay with just one because it is more “tax efficient.” This, combined with the accrued holiday pay policy, can result in some umbrella company directors and some of their staff controlling a massive pool of money that is then dispersed not to the contractors, but to umbrella employees in the form of bonuses.
Beware of holiday play exploitation in your contract
When teachers leave the umbrella, instead of paying out their accrued holiday pay as many agencies do, some umbrellas have exploited a clause in the contract. This clause would likely state that unclaimed holiday pay after a certain period reverted to the company.
You can still claim back this unpaid holiday pay even if you have left the umbrella. Unfortunately, some umbrella directors close down one outfit only to restart under a new company, just to get out of paying workers what they are due.
This is a practice called phoenixing. It is when an umbrella company closes up shop and transfers its business to a new company, often to avoid paying debts or taxes. This is usually done by the same people who ran the old company, and the new company may have a very similar name or structure.
HMRC must be informed of such cases.
Some outfits are helping contractors get their due holiday pay. If an umbrella is putting you off or causing delays, you can reach out to outfits who can look into this for you. The source named two in particular, SafeRec and Contractor Voice.
What You Can Do
If you have ever worked through an umbrella company, it is crucial that you contact them immediately and request any unclaimed holiday pay. Do not be deterred if they initially claim you have no accrued holiday pay. Be prepared to stand your ground and insist on a full accounting of your earnings and entitlements. You do not have to wait for their end of year or any other excuse.
If the umbrella company is claiming you do not have a right to unpaid holiday pay because there has been a time-lapse, tell them that you will need to inform HMRC that you are being denied your holiday pay.
- If you have any questions about your umbrella company’s payslip, a good place to start is with this link: HMRC Launches Pay Checker for Umbrella Workers – Freelance Informer
- You can also understand your employment rights through the Acas website.
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Industry Experts Spoke Out and the Government Listened
Industry insiders have confirmed with The Freelance Informer that this practice has been widespread, with some agencies even complicit in the scheme ( i.e., a 50/50 split of the amount of unpaid holiday pay). This, along with tax avoidance schemes, has placed reputable and compliant umbrella companies in murky waters. They are thankful of new changes set in motion, but for some umbrella workers, much too late.
The UK government has announced a major shake-up of the temporary labour market, aiming to tackle widespread tax avoidance within the umbrella company sector and improve conditions for workers, The Freelance Informer previously reported.
Legislation will be introduced that will shift the responsibility for Pay As You Earn (PAYE) from the umbrella company to the recruitment agency supplying the worker. In cases where no agency is involved, the end client will bear the responsibility. This change will come into effect from April 2026.
“Umbrella companies will no longer be legally responsible for operating PAYE on payments to the workers that they employ,” the government has stated in a policy paper.
“Workers will continue to receive their pay net of income tax and NICs following the introduction of the measure, although the business providing their payslip may change,” said the Policy Paper.
By reducing non-compliance in the umbrella company market, the government believes this measure will “prevent workers from being engaged by non-compliant umbrella companies”.
By placing the onus on recruitment agencies and end clients, the government aims to incentivise greater due diligence and ensure workers are paid correctly and taxed appropriately.
The end aim? Workers will no longer be party to non-compliant tax arrangements that could otherwise have left them facing large, unexpected tax bills.
Do teaching supply staff have to agree to work under an umbrella company or limited company arrangement?
According to the National Education Union in the UK, The answer to that question is “No.”
Some NEU members are told by their agencies that the agency will only offer work to supply staff covered by an umbrella company or limited company arrangement.
While lawful, the NEU strongly disapproves of this practice. But you do not have to agree to this and should ask to be paid by the agency on a PAYE basis. Many supply teachers find that an agency will agree to PAYE rather than lose the teacher to another agency. Being paid directly by the agency on a PAYE basis does not give you employee status – and the agency may say you won’t receive the same pay rate – but it does avoid the need for one of the above arrangements.
The NEU obviously does not endorse any umbrella company arrangement.
National Education Union
The Future of Umbrella Companies
With increased scrutiny and potential regulatory changes on the horizon, the future of the umbrella company model is uncertain. Some predict that many agencies will bring their payroll functions in-house to avoid liability, while others foresee the rise of alternative models such as PEOs (Professional Employer Organisations). What is also on the cards is consolidation in the umbrella market, which will mean less competition and potentially higher fees for umbrella workers.
Spread the Word
This issue could affect many workers given they are unaware they are being short-changed. Sharing this story on social media and with colleagues can help raise awareness and encourage others to claim what is rightfully theirs.
Don’t delay, contact your umbrella company today and demand all unclaimed holiday pay.