One of the most asked questions by contractors who are new to the contract working scenario is ‘What is the difference between an Agency PAYE and Umbrella?
While contractors do have the option to work under their own limited companies, most prefer working under an agency or umbrella as it keeps the overall process hassle-free. However, it depends on you if you choose an agent PAYE or Umbrella but it is one of the tough and important decisions of your contractor life.
So, here is a detailed comparison of why choosing an Umbrella over an Agency PAYE is always a better choice. But before we get into further discussion let’s first understand what PAYE is?
What is PAYE?
PAYE or ’pay as you earn’ is a standard income tax form in the UK which refers to deduction of tax from your salary by your employer before it is transferred to you. It shouldn’t be confused with a tax return, where individuals or businesses pay their tax annually, quarterly or monthly.
Agency PAYE Vs Umbrella
A contractor can choose either of the two to process their income through PAYE as both are concerned with the self-employed who have decided not run their own limited company. While both ensure that you don’t need to worry about taxes, an Umbrella company offers a few other advantages over Agency PAYE that constitutes the differences between the two.
- When you choose an Agency PAYE, you’ll be employed by them and they will be responsible for processing your salary which is the same with an umbrella too. However, with an Agency PAYE you won’t get the freedom to determine which jobs you’ll take. It will be the agency that will decide what jobs you take but with an umbrella company you have no such obligations.
- With an umbrella you just need to keep one employer i.e., the Umbrella itself while you work through multiple recruitment agencies, thereby opening doors for more and better opportunities. On the contrary with an Agency PAYE, you are legally bound to work with contracts that are advertised by that particular agency only.
- Rate of Pay: With an umbrella, the contractor becomes an employee of the company and can claim legitimate business costs and expenses like stationery, safety equipment, travel, accommodation and subsistence, which makes it a higher paying option for contractors. However, contractors can’t claim such expenses when working under an Agency PAYE.
- Employment rights: With an Umbrella, contractors get statutory benefits like holiday pay, sick pay and maternity/ paternity pay, and are also covered under the umbrella insurance which is not the case with Agency PAYE.
- 5. Company Tax Return and annual accounts to HMRC: While working under an agency PAYE, contractors need to send Company Tax Return and annual accounts to HMRC at the end of each year. However, choosing an Umbrella is again a wise choice as it takes care of all such filings.
Other benefits of working under an Umbrella:
- Minimum administration costs relating to in-house payroll, pensions, worker insurances and compliance.
- IR35 compliant
- Account management and support available.
- Contractors get regulatory advice and briefings.
- Continuous employment record
Even though an Umbrella company does take a service fee, it is always a better option for contractors who don’t want to set up their own limited company. The service fee may vary from company to company but considering the perks of working under an Umbrella, the fee is justifiable.