Umbrella vs Outsourced PAYE payroll, which is better?

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 the agency PAYE.

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.

What is PAYE?

PAYE (Pay As You Earn), is when 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.

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).

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.

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 pays 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 its income from the contractor (margin). So, there’s an argument to suggest that it’s easier for them to act in your best interests.

The Answer

If you want to work multiple contracts simultaneously, want the benefits & security of continuous employment, and are likely to claim for travel or subsistence expenses. Then an umbrella is the better option for you.

However, if you intend to contract for a short period e.g. taking one or two contracts, or want to get paid & get your contracts sourced by the same organisation, i.e. no third party. Then PAYE could be the better route for you.

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