Home » Umbrella Company » Umbrella vs PAYE Comparison

Contractor PAYE options

Fed up with invoicing and chasing payments? Looking for a simpler way to organise your payroll? Being a contractor gives you a range of trading options including the familiarity of a PAYE system. This option can help you save a considerable amount of time when you start contracting because much of the administration is handled on your behalf.

Additionally, if the way you work and the contract you are working under falls within IR35, it can be the only option available to you. Those new to contracting and not yet familiar with the responsibilities involved in running their own limited company may see it as a more convenient and user-friendly option. However, if you are considering the PAYE route, it is important to realise that there are two very different versions – PAYE via a recruitment company or PAYE via an umbrella company.

Is umbrella PAYE the same as agency PAYE?

Both umbrella PAYE and agency PAYE involve the contractor to becoming an employee and benefiting from having payroll processing handled on their behalf. This means you don’t need to worry about taxes, complying with IR35 or keeping detailed business accounts. However there are some key differences to be aware of, namely that working through an umbrella company will give you the ability to claim tax relief on expenses (subject to complying with a supervision, direction and control test or SDC test). In addition the umbrella company option will also offer you a number of extra benefits that are specially tailored to the needs of contract workers.

Here we look at the differences between umbrella PAYE and agency PAYE in more detail.

Agency PAYE or umbrella – which is best?

 

Set up & joining

 

Both the umbrella and agency PAYE options are easy to set up and you can join either payroll solution in a matter of minutes. Simply provide the company with your details via an application form together with proof that you can work in the UK. In many cases this can be done online. The umbrella or agency involved will typically need the following supporting documentation:

  • Certified ID
  • Proof of residence
  • Banking details so you can receive your payments
  • National Insurance Number

The only additional step for umbrella company workers is to provide the recruitment agency with the umbrella scheme details.

Rate of pay    

 

Your rate of pay will typically be higher if you choose to operate through an umbrella company compared to the agency PAYE route. This is because contractors using an umbrella can claim legitimate business expenses and costs (providing they pass the supervision, direction or control (SDC) test which came into effect in April 2016.) This can reduce the amount of tax and NI that is applied to your pay and effectively enhance your income.

By contrast an agency PAYE worker’s rate of pay will typically be lower as they can’t reclaim as many expenses.

Additional benefits

 

Both agency and umbrella company contractors are employed by the relevant company so they should have access to certain statutory benefits that are available to permanent employees, including holiday, sickness and maternity/ paternity pay.

A further advantage of joining an umbrella payroll scheme is that you receive your income for all of your assignments using your personal allowance and regular tax code, regardless of the number of recruitment agencies you use to find work. This gives contractors much more flexibility and the convenience of having one pay day, one tax code and one P60. This simplifies your tax affairs and makes it far easier to prove your income should you need to apply for a mortgage or other form of lending.

Costs involved with umbrella vs agency PAYE

 

If you choose to operate through an umbrella company they will take a small fee for the services they provide. The amount should be modest and prove to be value for money given all the administration and paperwork assistance they provide. Remember, if you’re not happy with your provider or you decide to change the way you work, you are always free (subject to any notice period) to switch to another company and find a better deal elsewhere.

Normally there is no direct cost to working through agency PAYE, however your agency should uplift your contracted rate if you opt for the umbrella route. This is to cover employment costs (such as Employer’s NI) and also account for the umbrella company’s margin.

rate of pay - umbrella companies

Job opportunities & working with multiple agencies

 

One of the big draws of joining an umbrella company as a contractor is that you can work with multiple recruitment agencies, while at the same time keep just one employer as you move from assignment to assignment. This means you are not restricted by the contracts advertised through just one agency, thereby giving you more opportunities to find the work that really excites and inspires you.

 

What admin is involved in umbrella PAYE?

 

As part of joining any PAYE system the employing company will take care of all accountancy and taxation matters and also deal with all administration. So with both umbrella & agency PAYE options the contractor will simply need to submit a regular timesheet.

In addition, those employed by an umbrella company can also submit claims for permitted out of pocket expenses.

Umbrella vs PAYE comparison table

Still undecided between PAYE options as a contractor? We’ve compiled a straightforward comparison table to help breakdown the pros and cons of each structure.

Umbrella Vs Agency PAYE Comparison - Umbrella Exchange

To us there is one clear winner for contractors.

Not only will joining an umbrella company enable you to work with multiple agencies under just one tax code, you can also claim legitimate business expenses which could increase your take home pay. Plus you will receive a number of additional benefits that are specially tailored to contract workers.

We’ll help you find the best solution for you

Ask us a question or find out how your take-home pay compares with one of our umbrella company options

Further reading:

Compare your payment options as an independent contractor.

Umbrella - Umbrella Exchange

Find out more about how umbrella companies work.

Insurance - Umbrella Exchange

Discover more about the kind of insurance you need as a contractor.