Umbrella Company or Agency PAYE?

Your exclusive guide to contracting through either an umbrella company or agency PAYE.

If being a sole trader or a limited company director is not for you, you have two main payroll options as a contractor: umbrella company employment or agency PAYE. But which one should you choose?

Whether you’re new to contracting, or if you’ve been doing it for years, making the right payroll decision is crucial. So, we’ve taken a look at the key differences between contracting through an umbrella company and contracting through agency PAYE.

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  1. What is an umbrella company?
  2. What is agency PAYE?
  3. What’s the difference between umbrella and agency PAYE?
  4. Is umbrella better than agency PAYE?
  5. How do I get paid through a PAYE umbrella company?
  6. Self-assessment or PAYE?
  7. Discover more
  8. Sign up now

What is an umbrella company?

An umbrella company provides continuous employment to contractors who are on fixed-term assignments. Umbrella companies act as intermediaries between the contractor and their agency/end client. With an umbrella company, you’ll remain in employment when your contract ends, or when you’re looking for a new assignment. Your contract will also persist if you’re working on more than one assignment.

Here’s Danbro Workforce Solutions’ Managing Director, James Burrows, discussing the benefits of umbrella company employment.

What is agency PAYE?

With agency PAYE (Pay As You Earn), a contractor gets employed by their employment/recruitment agency for the duration of the contract they have with their end client. They’re paid direct, through the agency’s payroll. Unlike the continuity of employment between contracts that umbrella companies provide, an agency PAYE worker’s employment ends when their contract with their client finishes.

What’s more, agencies tend to offer lower rates to their own PAYE workers. That’s in contrast to the often uplifted rates offered to contractors employed by umbrella companies.

What’s the difference between umbrella and agency PAYE?

Before you decide whether to get paid through an umbrella company or via agency PAYE, you need to consider things like cost, benefits, expenses, insurance, HR support, and continuity of employment. So, let’s take a look at each one in turn to see how they match up.

COST: There’s often no cost to working through agency PAYE. However, to cover the margin and various employment costs (such as the Apprenticeship Levy), agencies often uplift contracted rates for contractors who decide to go umbrella. An umbrella company’s margin is the only thing that should change between providers. For instance, some umbrella companies promise conspicuously high take-home pay. This often involves paying less tax and National Insurance contributions (NICs).

The government’s advice on this is simple: ‘these schemes don’t work. By using them you may be taking part in tax avoidance’. Work on the assumption that if it sounds too good to be true (in relation to tax), it’s often because it is. With our umbrella company solution, you only pay a margin when we process your payslip. So, you won’t pay a penny if you’re not working.

EMPLOYMENT BENEFITS: In both instances, you’ll become an employee of the umbrella company/agency PAYE. Each organisation will take care of your admin and payroll. And, under both options, you will get taxed under PAYE. The difference is, an umbrella company will be your only employer whether you’re on a contract or not. That continuity of employment will help when applying for a mortgage or credit. Whereas, with agency PAYE, each new contract is a different run of employment.

Whether you go umbrella or PAYE, you will have access to statutory employment rights, such as sick pay. Depending on the umbrella company, though, you could also have access to certain medical health plans too. Not to mention pension schemes and discount offers. We could also put you in touch with our financial planning team. They provide industry-leading support for mortgages, insurance, and other financial needs.

EXPENSES: As either an umbrella employee or an agency PAYE worker, you will get your wages via PAYE. With an umbrella company though, you could be eligible for certain work-related expenses. For instance, when you register with us, we’ll ask you to complete our ‘worker questionnaire’. This will determine your eligibility to claim ‘allowable expenses’. Allowable expenses are expenses that are “incurred wholly, exclusively and necessarily in the performance of your duties”. If you’re entitled to claim expenses, you can submit your claim through our exclusive online portal.

INSURANCE: Whichever option you choose, you’re going to need insurance. The better agencies/umbrella companies will provide the cover you need to perform your duties. Some umbrella companies also provide health, life, and accident insurance at no extra cost. For instance, with us, you’re covered by Public and Employers’ Liability insurance, as well as Professional Indemnity insurance.

IR35: Changes to (IR35) off-payroll working in the private sector come into force in April 2021. The aim is to prevent individuals who should be viewed as employees, from offering their services through a limited company illegitimately. IR35 impacts those who falsely position themselves as sole traders/limited companies.

So, generally, umbrella company employees and agency PAYE workers are outside of IR35.

SUPPORT: Employees should have access to internal HR support as and when they need professional advice or guidance. This includes anything from notice or pay disputes, to unfair dismissal. The quality and reliability of this support varies depending on the employer. However, whether you go umbrella or agency PAYE, you need to factor in potential periods of difficulty.

For instance, whilst an agency gets paid by the end client, an umbrella company receives their income from the contractor (margin). So, there’s an argument to suggest that it’s easier for them to act in your best interests.

Is umbrella better than agency PAYE?

Umbrella or agency PAYE? Generally speaking, if you:

• Work on multiple contracts simultaneously

• Want the benefits and security of continuous employment

• Are likely to claim for travel or subsistence expenses

... Umbrella company employment is the best option for you.

Alternatively, if you:

• Intend to contract for a short period - taking on one or two contracts (not at the same time) before going back into permanent employment

• Want to get paid and get your contracts sourced by the same organisation, i.e. no third party

... Agency PAYE could be a better route for you.

How do I get paid through a PAYE umbrella company?

Umbrella companies operate as employers on behalf of their contractor employees. It works like this:

  1. The agency/end client pays a contractor’s ‘contracted rate’ to the umbrella company.
  2. The umbrella company takes care of the statutory employment costs on behalf of the contractor. They work out the contractor’s total gross pay.
  3. They then pay statutory deductions, such as Income Tax and NICs, to HMRC before the contractor receives their net take-home wage in the same way as a permanent employee.

Umbrella companies shoulder the legislative and administrative burden of payroll - not you. It’s the hassle-free approach to contracting.

Self-assessment or PAYE?

You may also consider self-assessment as an alternative to umbrella or PAYE. With an umbrella company/agency PAYE, taxes get deducted before you receive your wages. On the other hand, those on self-assessment are required to pay the tax they owe either monthly, quarterly, or annually themselves.

With self-assessment tax returns, it’s best to seek the help of an accountant or tax specialist. Self-assessment can make it harder to manage your income, with the need to keep finances aside for lump-sum payments as and when required.

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