Agency PAYE vs Umbrella Company
Whether you are new to contracting or an experienced contractor, you might always ask yourself the question what is the difference between agency PAYE and an umbrella company?
In this blog, we will explain the difference between agency PAYE and an umbrella company and the reasoning for contractors to use these options.
What is IR35 and Why Do Contractors Have to Be Paid Through Pay as You Earn (PAYE)?
Before explaining these options, it is essential to clarify why contractors must be paid through either of these PAYE options and how the recent IR35 changes have affected how contractors work.
On April 6, 2021, IR35 rule changes came into effect, meaning that medium and large-sized private sector end clients now bear the legal responsibility of deciding the IR35 status of all the contractors they use.
IR35 or off-payroll working rules is the legislation created to stop what HMRC saw as tax avoidance by disguised employees. Disguised employees were using limited companies to be paid to avoid paying the correct amount of tax when they were direct employees of the end client company.
With IR35 changes, all contractors will have an IR35 status issued by an end client company for their work assignments. The IR35 status that an end client issues will determine how a contractor should be paid. If your work assignment is deemed inside IR35, you must be paid through Pay As You Earn (PAYE), with income tax and national insurance contributions being deducted before you are paid. If your work assignment is deemed as outside IR35, then you can be paid through your limited company.
What Is Agency PAYE?
As a contractor completing work assignments and needing to be paid through PAYE, the Agency PAYE option is when the recruitment agency you are working through takes on the responsibility of paying you through their internal payroll. Your recruitment agency would pay you using the PAYE method with income tax and national insurance deducted before you are paid as you complete your contract through them. It is worth noting that the agency PAYE option would end once your contract with the end client has ended.
As a contractor, you would consider using agency PAYE if you:
- Are intending to be a contractor for a very short period through one agency.
- Want to avoid using a third party to process your payroll.
- Want low admin costs for your payroll without statutory employments benefits included.
What Is an Umbrella Company?
The safest and most popular option for getting paid through PAYE is the umbrella company option. An umbrella company is a company that employs and pays contractors or freelancers as they complete work assignments through recruitment agencies and end clients. Instead of an agency paying you through agency PAYE, an umbrella company will employ and pay you while acting as an intermediary between a contractor and the recruitment agencies and end client companies they work with during work assignments.
An umbrella company will manage all your payroll admin, processing of all your timesheets, invoicing, collection of funds from your agency or the end client, pension contributions and holiday pay while making sure you are paid compliantly with all the correct tax deductions.
A compliant umbrella payroll company will always provide you with a clear payslip every time you are paid, displaying your gross pay, tax deductions and your take-home pay.
When registering with an umbrella company, you will be given an overarching contract of employment to sign, which allows you to be paid through your umbrella company while completing assignments with various recruitment agencies.
If you are a contractor looking to complete contracts in the medium to long term while avoiding payroll admin, then using an umbrella company is the best option.
What Is the Difference Between Agency PAYE and An Umbrella Company?
Is There a Difference in Pay Rate When Using an Umbrella Company?
As a contractor using an umbrella payroll company, you will always get a higher rate of pay in comparison to using agency PAYE. When a contractor is paid through agency PAYE, the agency acts as your employer with employment costs such as pension costs, national insurance and holiday pay being passed onto HMRC.
When using an umbrella payroll company, your umbrella company becomes your employer and takes up the responsibility of paying you with these same employment costs. Agency Workers Regulations (AWR) states that after 12 weeks' continuous employment in the same role, a contractor should get the same terms, conditions and pay as the end client's internal employees who would be paid through PAYE. Your take-home pay through an umbrella company will be higher than agency PAYE because your take-home pay must take into account tax and employment costs, so your take-home pay is the same as an end client's internal worker. For example, if an end client's internal employee is paid £660.97 after-tax, you as a contractor must have your rate of pay increased, so your take-home pay is £660.97 after employment costs and taxes.
Why is Unified Payroll the best umbrella company option?
Using an umbrella payroll company to be paid as a contractor is the best option in comparison to agency PAYE. While there are many umbrella companies out there, it is crucial that you use a compliant and helpful umbrella payroll company, so you save time and money. As a compliant and trusted umbrella payroll company Unified Payroll is one of the leading umbrella companies in the UK, offering a hassle-free payroll service for all contractors.
Contractors use our payroll service because we:
- Are a compliant umbrella payroll company that pays contractors while following IR35, HMRC guidelines and AWR so you never have to worry about getting unpaid tax bill penalties from HMRC.
- Manage every aspect of your payroll, so you can get paid on time without having to worry about your tax affairs.
- Offer an overarching contract of employment so you can complete contracts through various recruitment agencies or end client companies while still being paid through our umbrella payroll company.
- Allow contractors to claim legitimate mileage expenses when travelling between multiple sites during their working day.
- Have an employment contract that protects your statutory employment benefits such as sick pay, maternity/paternity pay and holiday pay so you can work as a contractor while getting the benefits of an employee.
- Give a financial reference for all our contractors when they are applying for mortgages or loans.
- Have our expert sales, customer service and payroll teams always ready to answer any questions you may have while advising and explaining complex legislation like IR35.
- Have Unified Loyalty Perks, our online portal, which allows you to get exclusive offers and discounts at over 7500 high street retailers, including Tesco, Costa Coffee, Sainsbury's, Asda, Marks and Spencer's, Currys PC World and many more.
If you have any questions about joining our PAYE umbrella scheme, HMRC guidelines, IR35 and AWR legislation, you can contact our expert sales team.
Our sales team are available Monday to Friday from 9 am to 5 pm.
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