If you do not operate as a sole trader or hold the position of a limited company director, your main choices typically involve either working for an umbrella company or opting for agency PAYE. This choice may not be easy to make.
The Umbrella Company Option
The umbrella company offers ongoing employment to contractors who work for a set period of time. Umbrella companies act as your employer to process your tax and all statutory costs of employment. They can act as a payroll solution for any and all agencies you may work with as a contractor.
Unlike regular jobs where you must stop working when your contract ends, if you’re with an umbrella company and don’t find a new job right away after finishing a role, you are still considered employed until you do as they act as your employer. This makes it easier to move between projects without any gaps in employment.
When working through an umbrella company, the employment structure is:
- a client — the business that needs temporary workers
- a recruitment agency — that finds temporary workers for a client
- an umbrella company — your employer for temporary work from that recruitment agency
- you (the worker) — who contacts the agency about temporary work
The Agency PAYE Option
In agency PAYE contracts, the company/client where the contractor works becomes the employer for tax reasons, in charge of the statutory costs on employment. The contractor is paid directly from the payroll of the agency/recruitment company.
Agency PAYE vs Umbrella Company
Cost Considerations
The amount of money that workers take home at the end of each payment method varies significantly. Umbrella companies offer transparency since taxes are deducted before funds reach employees’ bank accounts; this means individuals know exactly what will be deposited into their account every payday. The payslips the contractor receives will detail all deductions. The rate is usually uplifted to cover the employment costs.
Agency PAYE will ordinarily offer the same return and pay the contractor directly. PAYE rates are usually lesser as they already consider the employment costs.
Employment Benefits
In both models, contractors get employment benefits. This means that administration and wage calculations are done by those who hired them. But the continuity of work offered by umbrella companies can be very helpful when applying for mortgages among other things.
Insurance Covers
Both options necessitate that contractors obtain suitable insurance coverage. Reputable agencies and umbrella corporations offer comprehensive insurance policies, encompassing public liability, professional indemnity, and employers’ liability coverage.
IR35 Compliance
Employees of Umbrella Companies and staff under agency PAYE are all inside IR35.
Services Support
Different employers offer different levels of access to internal HR support while others don’t have any at all, but this does not mean that there isn’t any help available from as both agencies and umbrella firms assist with other employment related issues too.
Making the Decision
Why Choose Umbrella Company
- Ideal for contractors juggling multiple simultaneous contracts
- Offers continuous employment benefits and security
- Potential eligibility for travel or subsistence expense claims
- Additional perks like employee discounts may be available
Why Choose Agency PAYE
- Suitable for short-term contracts or transitioning back to permanent employment
- Direct payment and contract sourcing from the same organization
- Simplified payroll without involvement in administrative burdens
Getting paid through an Umbrella Company
Contractors under umbrella companies benefit from a streamlined payment process:
- The agency or end client remits the contracted rate to the umbrella company.
- The umbrella company manages statutory employment costs and calculates the contractor’s gross pay.
- After deducting statutory obligations such as Income Tax and NICs, the umbrella company disburses the net take-home wage to the contractor, akin to a permanent employee.
Exploring Self-Assessment Option
For some contractors, self-assessment may emerge as an alternative to umbrella or PAYE arrangements. While umbrella and agency PAYE involve tax deductions before receiving wages, self-assessment entails self-payment of taxes, necessitating prudent financial management and potentially consulting with tax professionals.
Ultimately the decision to choose whichever payment model depends on various factors, including contract duration, financial preferences, and desired employment benefits.
