Umbrella Company v PAYE

Umbrella Company v PAYE
The business world is constantly providing options, and one of yours might be deciding whether to stay fully self-employed, to source work via an umbrella company or to obtain work via a PAYE agency. We’ll help you make the umbrella vs PAYE decision a little easier with this article.

Below is an overview of what you can expect from an umbrella company payroll provider or a PAYE payroll provider and your personal impact.

Continuity

The major difference between these two options is the continuity of your employment timeline.  The simplest way to explain it is with a graphic:

PAYE AGENCY  
NEW EMPLOYMENTNEW EMPLOYMENTNEW EMPLOYMENT
NEW CONTRACTNEW CONTRACTNEW CONTRACT
UMBRELLA COMPANY  
CONTINUOUS EMPLOYMENT
NEW CONTRACTNEW CONTRACTNEW CONTRACT
With Agency PAYE work, each new contract will be a separate, independent employment contract between a business and its employee. It will end when the work ends. This has credit rating negatives.

This is because the recruitment agency is just running your payroll.

Employment with an umbrella company also means they’ll run your payroll, BUT an umbrella company also offers you several additional benefits that are thoughtfully chosen or structured for temporary workers.

More importantly, your employment is continuously running, like an umbrella; overall, you work from contract to contract. So, even though you are moving from one scope of work to the next with definite end dates, you only have one employer – the umbrella company.

You will be paid for all of your assignments at once, be it from one agency or ten. You get the wonderful benefit of monitoring and tracking one payment, one payday, one tax code and one P60 and one pension provider.

This is a very valuable asset to have. Should you wish to apply for a mortgage for a family home, or a loan to buy a new company vehicle or do a visa application or limit increase, this employment continuity makes life easier.

Insurances

Many reputable, established agencies, as well as Umbrella Companies, will definitely provide any cover that is deemed necessary in order for employees to be able to perform your work.

Workers can also inquire with any new umbrella companies if they are able to provide additional cover like health insurance, life cover, retirement schemes, accident cover, and funeral cover at no additional cost.

Do You Pay Less Tax With Umbrella Company?

The most important expense to discuss is PAYE. Luckily, regardless of whether someone is employed via an Umbrella Company or an agency, they are “inside IR35”, and the salary will be processed with PAYE applied. See our article on tax thresholds relating to umbrella and PAYE agencies  You will pay the same PAYE tax regardless of whether the worker operates via a PAYE agency or an umbrella company.

You may find, however, that with some Umbrella Companies, there might be an opportunity to claim tax relief. This tax relief could possibly be considered on some work-related expenses. An umbrella company that is looking for the best solutions for its contractors will discuss this with its employees. Their tax advisor will review the facts presented and will advise whether the enquiry is eligible for tax relief or not. In the instance that a positive outcome to this enquiry is received, it will result in the reduction of the amount of tax you are obliged to pay.

You might be eligible for claiming these expenses or getting tax relief:

  • Are you doing continuous professional development?
  • Have you worked at two or more places on the same workday?
  • Do you drive or cycle to a central point to collect the work scope assignments for the day?
  • Was a relocation required in order to facilitate the acceptance of a new contract?
Your expenses are usually included in the contracted rate you agree with your recruitment agency for your services. No tax or National Insurance (NI) is calculated on allowed expenses.  This means that any claims will increase the portion of your income that is free from these deductions. This results in reducing your tax and NI the more expenses you claim.

Benefits

As umbrella companies are specifically designed for “housing” contractors, freelancers and supply workers, they will have benefits to support workers. Your success is their success. A good umbrella company will be an expert on related matters, tax advice or contracting and employment issues. They will be able to discuss tax codes and advise you on your rights under the Agency Workers Regulations.

You should receive statutory benefits such as sick pay, holiday pay and maternity/paternity leave. You could also have access to medical health plans.

A PAYE agency will require employees to accept all work sent your way. An umbrella company will allow you the freedom to choose which work you want and when to do it.

HR Support

A soft benefit that an umbrella company would give its employees is support when a grievance arises or when they just generally need some support. The quality of this support can be expected to vary as with all companies, i.e. the bigger the employer, the more advanced the support tends to be.

When choosing between an umbrella company and a PAYE agency, you should follow your gut.  Which choice makes you feel more reassured?  Which choice do you feel is the one you can most depend on when things don’t run smoothly?

Do remember that a PAYE agency is ultimately paid by the end client, and this could be a source of conflicting interest in the advice and support they give to you – or to the end client.  Umbrella companies receive their income from you, which switches the focus of attention completely into your favour. It makes sense then that the umbrella company will be more inclined to be biased, even unwittingly, to act in your best interests. When things get bumpy, you might find yourself more supported or more comforted by an enhanced HR support system from an umbrella company.

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