Managing Your Cash Flow
The difference between an umbrella company and agency PAYE
5 min read
16 June 2017
Confusion about the difference between an umbrella company and agency PAYE spread when Labour’s manifesto suggested banning the former. With that in mind, we unveil the distinctions you should be aware of.
PAYE vs Umbrella company
Those seeking the difference between an umbrella company and agency PAYE will have undoubtedly come across Labour’s plan to ban umbrella companies prior to the general election.
It comes off the back of trade union discontent, claiming workers were denied their basic rights. But you’d be surprised how similar an umbrella company’s concept is to a recruitment agency.
Both concern the self-employed who would rather not run their own limited company. While it would see you crowned with the title of director, many find it a less flexible and tax efficient option.
Difference between an umbrella company and PAYE
In comparison, an umbrella company or recruitment agency would pen you as an employee – a status which has distinct advantages. For starters, your payroll and administration are taken care of for you.
It was also explained to us by Julia Kermode, CEO of the Freelancer and Contractor Services Association, that in theory someone should earn the same amount no matter which option they choose, with the extras and deductions planned for in the assignment rate. That is, “providing all hidden costs are factored in”.
Given these similarities, is there really a difference between an umbrella company and agency PAYE? The answer is yes, but only slightly.
Umbrella come under fire
An umbrella company could be deemed the middle man, linking contractors with employees. The contractor would have outsourced its payroll function to the umbrella company, which ensures staff are paid and that tax deductions are made. Given that each provider has a different approach though, you should research carefully.
Labour’s Jeremy Corbyn may have missed that memo. He pledged to clampdown on umbrella companies, largely in concern for the lack of disregard to workers’ rights. Of course, what Kermode made clear in the BBC, was that “Labour clearly doesn’t know what they’re talking about“.
Indeed, a key difference between an umbrella company and agency PAYE is that the former offers all 84 statutory benefits and rights of employment, the same as any permanent employee – nifty perks include sickness, holiday and maternity and paternity pay. In comparison, someone paid through an agency is classed as an agency worker, affording them only 29 rights.
For the agency worker, Kermode suggested, there are of course some additional rights regarding equal treatment. But being employed is a benefit in itself, “particularly if the individual is looking to apply for finance such as a mortgage or loan, because lenders will often need to see evidence of employment status.”
Is a recruitment agency the way to go?
An agency also acts as an employer for tax purposes. But there’s no middle man, and such firms tend to get involved in identifying or negotiating the employment contract.
But that’s not the biggest difference between an umbrella company and agency PAYE. If you’re looking for short-term temporary work, a recruitment agency is your best bet. If a series of jobs lies in your future, then consider an umbrella company.
Think of it this way: if you were a supply teacher intending to work for five different schools, then chances were you would receive five different payments from different sources working under a recruitment agency. On the other hand, an umbrella company would consolidate it all into one payment. It would give you one pension pot and one tax code.
PAYE vs Umbrella company: things to consider
There’s more to consider in terms of which is more attractive though. Zoe Fatchen, director of Gowling WLG, explained to Real Business: “If the individual provides services to the public sector and the arrangements are within IR35, the recruitment agency will apply PAYE even where the individual has established a personal service company.
“If IR35 does not apply, a recruitment agency’s PAYE scheme can be more flexible than a PAYE umbrella, depending on the circumstances. For example, an individual providing services to a range of clients through a number of agencies under non-IR35 arrangements may be treated as self-employed individual and may not need to be on an agency’s payroll. If not, that individual would deal with his or her own tax affairs.”