Umbrella or PAYE?
4 minutes to read
You’ve registered with a recruitment agency and you’re raring to get going with your new contracting career. But first, you’ve been given a choice between using an Umbrella company or going through your agency’s PAYE. So which should you choose?
Umbrella vs. PAYE
Most of us are familiar with standard Pay as You Earn (PAYE). If you pick this option, it means that your agency runs your payroll. If you go with an Umbrella, they’ll run your payroll instead. But an Umbrella also offers you a number of additional benefits that are specially tailored for temporary workers.
An Umbrella company is an employer; one that employs contractors, freelancers and supply workers. When you join, you become their employee. You and the Umbrella are both bound by a contract of employment which remains in place even when you’re in between agency assignments.
So, not only do they run your payroll, they also give you a range of employment-related benefits. These benefits aren’t relevant for everyone, and this guide will help you figure out whether or not it’s right for you.
Is an Umbrella right for me?
If you fall into one or more of these groups, an Umbrella is most likely to be your preferred route:
You don’t want to lose the security that permanent employment gives you
Your Umbrella can pay you benefits, such as maternity and paternity pay if you’ve got a little one on the way, and sick pay when you’re under the weather.
You work with multiple recruitment agencies
Your Umbrella should be able to pay you for all of your assignments at once, be it from one agency or ten. You get the benefit of one payment, one pay day, one tax code and one P60. It simplifies your tax affairs and makes it easier to prove your income (for example, on a mortgage or visa application).
You’d like expert advice and support on contracting-related matters
A good Umbrella provider will be an expert on matters related to temporary workers. It’s likely they’ll offer to support you throughout your career, by advising on tax, pay, contracting and employment issues. For example, they should be able to answer your questions on tax codes and help you understand your rights under the Agency Workers Regulations.
You incur expenses
With an Umbrella, there are certain situations in which you may be able to claim work-related expenses. The most common are:
- If you do any continuous professional development
- If you work at two or more places in the same day
- If you drive (or cycle!) to a central point to collect your assignments for the day
- If you relocate in order to accept a new contract
Your expenses are included in the daily or hourly rate you agree with your recruitment agency for your services. No tax or National Insurance (NI) is owed on your allowable expenses, so claiming increases the portion of your pay that is free from these deductions. Effectively, the more expenses you claim, the less tax and NI you pay.
Is there anything else to consider?
Take-home pay
When you’re employed by an Umbrella, the daily or hourly rate your agency agrees for your assignments includes a margin for the Umbrella and certain employer’s outgoings. If you were paid PAYE, the rate would not include these things, because your agency would pay them separately. For this reason, an Umbrella rate should be higher than a PAYE rate.
Your take-home pay on Umbrella could be higher or lower than PAYE, or about the same. The difference depends on the difference between the rates offered, how many days you work each week and how much the Umbrella retains as their margin.
Extra perks
Every Umbrella offers the same basic employment-related benefits. On top of that, many will have a range of extra perks designed to support you in your contracting career. If a particular Umbrella has been recommended to you, it’s worth giving them a ring to find out exactly what you’ll get from working with them.
Decision time
So, Umbrella or PAYE? The answer will depend on your individual circumstances. Hopefully the information in this article helps you reach a decision. Any good provider should offer a free, no-obligation telephone consultation, which can help you make up your mind.
