I punch a decorative breathe-hole in my packaging, too. The punch that I use is a 29mm scalloped oval from here (scroll down to the 9th row, second from the left):
http://www.scrappilyeverafter.com/large.htm
This is what it looks like on my packaging (this is just a quickly thrown-together sample of my packaging, btw, which is usually more colorful in design):
Anyway, the punch in question has about a 1" lead-in space from the back wall of the punch to where the scallop begins, and the slit opening is a generous 1/4" in thickness, which gives me more than enough space to be able to punch a hole in the bottom of my label.
What I do is I first position where my label should go on my wrapping-paper by temporarily wrapping my bar of soap with removable tape. Then I stick the label on.
Secondly, I unwrap my now-labeled soap, lay the wrapping flat, and fold up the bottom edge of the paper over and over onto itself accordion-style until it just reaches the bottom edge of my label.
Thirdly, I take my punch and flip it upside-down so that the open bottom part of the punch is facing me (this helps me to see what I'm doing in order to be able to position the punch correctly), and then I thread the folded-up end of my wrapping paper through the punch's slit and position it to where I think the scallop should be punched through my label.
Fouthly, working on a flat, solid surface, I press down on the punch (it's still upside-down with the bottom of it facing me, btw), and voila! A nice pretty scalloped beathing hole has been added to my packaging.
Lastly, I slide my wrapping paper out of the punch's slit, un-fold the 'accordian' I made, and then wrap up my bar as usual.
It's kinda time-consuming, but since I don't sell (only gift to family and friends), it works out fine for me. Besides, it leaves such a pretty touch that the extra time is worth it to me.
IrishLass