PAYE vs. Umbrella Company: What’s the difference?

PAYE vs. Umbrella

If you are a contractor and want to work as an independent person, you have to associate either with a PAYE agency or an Umbrella Company. A private limited company or a self-employed person are not required to go to the PAYE or Umbrella Company. If you are wondering about the difference between PAYE vs. Umbrella, then continue reading this article.

Either of these two agencies has its own benefits, costs and fees, so you need to go for a holistic analysis of these two agencies. The differences mean a lot when you want to achieve specific goals in your career as a contractor.

Therefore, you need to align your goals with the agency or company after taking into account the main differences. It will help you make a final and wise decision that will serve you in the long run.


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What is PAYE Agency?

PAYE stands for Pay As You Earn. As the name suggests, a contractor is paid when he is hired for a contract. After the contract is complete, you are paid and then you have to look for another contract with the PAYE agency.

Working on a single project or short-term projects makes the PAYE agency an ideal choice for contractors. Moreover, the PAYE recruiting agencies deduct income tax and National Insurance Contributions (NICs) from your pay before you receive it. It consists of all the sick pay, maternity and paternity pay and adoption pay.

PAYE agency is a recruitment agency providing contract-based employment to contractors. Comparatively, they pay lower rates to their employees and end the contract as soon as the contract is complete. The employee has to start over again to work on a new contract.


What is an Umbrella Company?

An Umbrella Company provides continuous employment to the employees, no matter if the contract has ended. You will remain employed with the Umbrella Company. Another advantage of Umbrella Company is the contractor will get higher rates than the PAYE agency.

With an Umbrella Intermediary Company, you can work as a contractor on multiple assignments and fixed-term projects without renewing the contracts with this company. Similarly, an Umbrella Company deducts the income tax and National Insurance Contributions (NICs) before you receive the salary.


PAYE Vs. Umbrella

Following are the key differences between PAYE vs. Umbrella and you can work as a contractor with either of these recruiters after considering these differences.

Cost: There are certain costs associated with Umbrella Company. For example, you have to pay less in income tax and National Insurance Contributions (NICs) if you want to get a higher take-home pay. On the contrary, there’s no cost associated with the PAYE.

Expenses: The PAYE will pay the manager through their PAYE agency. On the other hand, an Umbrella Company will charge some costs for working with them.

HR Support: HR support is crucial to alleviate the concerns of the employees. Sometimes, you need HR support regarding unfair dismissal or pay-related issues. The PAYE agency does not provide much HR support because the end clients directly pay them.

On the contrary, an Umbrella Company is likely to provide HR support to its contractors as the end client pays the contractors directly and the umbrella Company takes a part of this as a fee. So, they are more likely to support the contractors with their HR advice and guidance.

Take-Home Pay: Take-home pay with the Umbrella is relatively higher as the margin of Umbrella Company is also a part of this. On the other hand, the PAYE does not include these costs as their payrolls.

Employee Benefits: In Umbrella Company, the company remains the employer of the contractors even after the project completion. So, the employer has to provide facilities for medical plans, pension plans, special discounts and offers, insurance and mortgages. On the other hand, the relationship between employees and employers comes to an end with the project completion. However, the employee will be taxed in these two agencies for income tax and National Insurance Contributions.


The Final Thoughts

Wrapping up, we can conclude that PAYE is ideal for those contractors looking for short-term contracts and wanting to work on a single project at a time. However, they will receive payment via the agency’s payrolls and will receive lower rates for their services.

On the other hand, an Umbrella Company plays the role of an intermediary between the contractor and the end client. The contractor receives a relatively higher income and is allowed to work on more than one project at a time.

Lastly, if you are going to work as a contractor, you must look closely at the key differences between each of these two companies.


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Disclaimer: All the information provided in this article on PAYE vs. Umbrella, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.