Umbrella VS PAYE – What’s The Difference?

16 October 2023

Navigating the world of contracting, employment, taxes and compliance can sometimes feel like deciphering a complex code.

Two terms you’ll often hear in the world of contracting, are “umbrella employee” and “PAYE.” If you’re scratching your head wondering about the difference between umbrella and PAYE, don’t worry! In this article, we unravel the mystery behind these terms.

What is PAYE?

Before we dive into the umbrella employee concept, let’s start with the basics: PAYE, which stands for “Pay As You Earn”, is the system used by HM Revenue and Customs (HMRC) to collect Income Tax and National Insurance from employment. Simply put, employers must deduct income tax and National Insurance contributions (NICs) directly from their employees’ wages and pay these amounts to HMRC each time they pay their workers, meaning workers are paying their taxes as they earn.

When you operate via PAYE, you usually work for one company, so this is the standard employee/employer situation you’ll likely be familiar with.

You can be a contractor and still be paid via PAYE by opting to join your recruitment agency’s payroll (usually referred to as agency PAYE) or by joining an umbrella company, like ours. Your taxes and National Insurance contributions are deducted directly from your earnings by your recruitment agency or by us as your umbrella company before you receive your take-home pay, so it’s a really simple way to get paid compliantly.

Agency PAYE can be a suitable option for you if you want to work on short-term projects for different clients though it may mean you are tied to a particular employment agency. If you find a different contract via a different agency, you may have to switch to the new agency to administer PAYE through their payroll systems. In the event you operate via multiple agency payrolls at the same time, only one will hold your tax code, meaning all other payments would likely be subject to emergency tax.

It can be simpler to join an umbrella company. You’ll pay the same amount of tax and NI but can easily switch between assignments without having to switch umbrellas. The continuity of employment can also make it easier when you want to apply for mortgages or other sorts of loan.

What is an umbrella employee?

An umbrella company employs you for all the work you complete for agencies, be that one agency or multiple. The umbrella company acts as an intermediary between you and the clients or agencies you work for. Instead of being directly employed by the agency or the end client, you become an employee of the umbrella company.

As the umbrella company engages contractually with the agencies instead of you, you are free to undertake as many assignments as you would like without having to change employer – meaning one tax code and no emergency tax.

Another benefit of being with an umbrella company is that you receive the same rights as any other employee, so you’re entitled to benefits such as sick pay, holiday pay, maternity/paternity pay and a myriad of other enhancements. You will be able to join the umbrella company’s pension scheme and, with our umbrella, you’ll have the option to pay into a private pension as well, or instead.

The advantages of being an umbrella employee include:

  1. Contractor friendly: if you work on short-term contracts, being an umbrella employee can provide stability. It allows you to take on different assignments while maintaining a consistent employment status. This can make it easier to apply for mortgages and other types of loans.
  2. Administrative support: your umbrella company will handle administrative tasks such as invoicing clients, processing payments, and dealing with taxes. This can be a major relief, saving you time and effort.

It’s important to note that compliant umbrella companies will handle tax deductions based on the PAYE system, ensuring that the correct amount of tax and NI contributions are paid to HM Revenue & Customs (HMRC). So there should be no difference between the tax and NI you pay if you use agency PAYE or umbrella.

Navigating the intricacies of tax payments can be a daunting task, especially for individuals working as contractors or freelancers. If you opt for umbrella employment, it’s important to distinguish between the good, the bad and the ugly. This is where the role of a reliable umbrella company comes into play, ensuring that you pay the right amount of tax without the stress and uncertainty.

Whilst more regulation is on the cards, not all umbrellas operate compliantly. That’s why we value our FCSA accreditation, as the rigorous annual audit process helps to prove that we do everything the way it should be done. Plus, we have hundreds of positive reviews on TrustPilot from contractors who enjoy working with us.

Why work with us?

Our team is here to help you decide if umbrella employment is right for you. If it is, then you’ll be in safe hands by joining our umbrella company which is one of the longest-established in the UK. We support tens of thousands of workers week-in, and week-out, ensuring they get paid accurately and on time.

Expertise & compliance

We operate an FCSA-accredited Umbrella company, so you can rest assured that everything is done as it should be.

Timely payments

We will ensure your payments are processed without delay. We’ll ensure your taxes, National Insurance contributions, and other deductions are accurately calculated and deducted before you receive your earnings. This streamlines the process, minimising the risk of unexpected tax bills further down the line.

Transparency & clarity

We provide you with clear breakdowns of your income, deductions, and taxes, so you have a comprehensive understanding of your financial situation. This transparency builds trust, allowing you to make informed decisions about your finances, and helping you plan ahead effectively.

Peace of mind

Tax matters can be a source of stress, but working with a reliable umbrella company offers peace of mind. You can focus on your work and career development, knowing that your tax responsibilities are being handled accurately and professionally. Our team is available to you to answer any questions and provide the support you need.

In summary…

Whether you opt for agency PAYE or umbrella employment, there should be little to no difference in your take-home pay. Both are straightforward options which means your taxes and National Insurance contributions are deducted before your take-home (net) pay is passed on to you.

The right choice is the one that aligns with your individual needs and career aspirations, so speak to us for tailored advice and guidance.

 

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