PAYE or Umbrella?

(4 minutes to read)

Once you’ve decided to join the flexible-working sector you will need to choose whether you want to go down the umbrella company or agency PAYE route.

PAYE or Umbrella: Which is best?

When it comes to looking at which is best between the two, that’s entirely dependent on your preferences and what will work best for you.

Both a PAYE agency and an umbrella company will take care of your admin and payroll, and so all tax liabilities will be worked out and automatically deducted from your payslip.

An umbrella company will be your only employer (whether you’re on contract or not), whereas with an agency each new contract is a separate run of employment.

Because of this, you will have more of a relationship with your umbrella company, especially if you have your very own appointed Contract Manager – this is something that we at Contractor Umbrella provide as we believe it helps to create a hassle-free experience.

Read our Benefits of Working for Contractor Umbrella to find out what else we can offer you as an employee.

What are the differences between umbrella companies and PAYE agencies?

An umbrella company is the middle man between the contractor and their client – the umbrella employs a temporary worker on behalf of an agency and the agency will then provide the services of the worker to their clients.

As mentioned previously, a PAYE agency will also employ a worker, however, unlike an umbrella company, the employment ends when each contract finishes.

If you’d prefer to receive your pay and contracts from the same organisations without a third party, or you’re looking at just carrying out a couple of contracts before going back into permanent employment, then an agency is probably your best option.

If, however, you’re considering working on multiple contracts and want additional benefits and security, then the umbrella route is a good choice.

It’s worth noting that it can be beneficial having the continuity of employment that an umbrella offers if you are planning to apply for a mortgage or credit.

Which option is more cost effective?

There isn’t usually a cost for working through an agency, however, there is a charge, or what is called an ‘umbrella margin’, for using an umbrella company.

This is due to the fact that an umbrella will provide additional benefits compared to a PAYE agency.

An example of this is that a good umbrella company will usually offer insurance packages, which is something that you would likely have to organise yourself even if you were working through an agency.

For more information on what you can expect from an umbrella margin, read our How Much do Umbrella Companies Charge? page.

Tax avoidance schemes

If an umbrella company’s ‘fees’ seem too good to be true, then they probably are…

It’s vital not to be tempted by an umbrella that claims you’ll be able to keep more of your earnings compared to other companies, as this could very well be a tax avoidance scheme.

Most umbrella companies are legitimate, but you need to be aware that some are not – the warning signs to look out for are:

  • If there’s a third party in the chain making the payment.
  • If you’re asked to sign an annuity, loan or other agreement which involves a non-taxable element of pay.

If you are caught using a tax avoidance scheme you’ll have to pay the tax that you owe, plus interest and even a penalty, so if you suspect that there may be non-compliance taking place then you should contact HMRC as soon as possible by reporting it via an online form on the GOV.UK website.

Read our Best Umbrella Company page for more information on how to find a good umbrella company.

If you’d like to sign up or need any further information on working through an umbrella company, please call one our friendly experts on 01206 591 000 or email Jaime at jaime.thorpe@contractorumbrella.com.

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Still thinking about if you should join Dolan Accountancy?

Give us a call on 01206 591 000 or email servers@createdesigns.co.uk

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