Umbrella companies vs. PAYE

Umbrella companies vs. PAYE

 

On the face of it, there might seem like little obvious difference between working under an umbrella company and paying PAYE (Pay As You Earn) income tax via an agency payroll.

But the repercussions for your financial circumstances can be significant, so it's worth taking the time to learn a little more about the differences between umbrella companies and PAYE.

For example, you could be missing out on tax-deductible pension contributions, the ability to claim back your business expenses, and the advantages of being in continuous employment on paper.

On the face of it, there might seem like little obvious difference between working under an umbrella company and paying PAYE (Pay As You Earn) income tax via an agency payroll.


But the repercussions for your financial circumstances can be significant, so it's worth taking the time to learn a little more about the differences between umbrella companies and PAYE.


How an umbrella company works


When you work under an umbrella company, you become an employee of the company for legal and tax purposes.
Agencies pay the umbrella company instead of paying you directly. The company handles all the necessary deductions, such as PAYE and National Insurance contributions, and pays you your entitlement as a salary.


What do I have to do? 


As an employee of an umbrella company, you continue to work for the agencies you would ordinarily work for, and use the umbrella company's online portal to submit legitimate business expenses and log time sheets.


You can substantially cut down on your personal admin time, as the company takes over calculating your PAYE and NI, and will also calculate any appropriate tax relief on your allowable business expenses.


What are the advantages?


One major advantage is that you have a contract of employment which remains in place over the long term, which can be beneficial when applying for loans and mortgages, as proof of continuous employment.


You may also find you have more take-home pay at the end of all the calculations and appropriate deductions - and remember that with PAYE, you will not have to pay a lump sum tax bill each January.

There may also be additional benefits like holiday entitlement, statutory sick pay and other rewards, depending on the umbrella company you choose to work under.


How does agency payroll work for PAYE?
 

Agency Pay As You Earn (Agency PAYE for short) is a way for contractors to pay tax as you go along. Each time you take on a new contract, you are enrolled as an employee by the agency, paid direct via the agency payroll, and any necessary tax deductions are made at the time you are paid.

The result is confidence about your take-home pay, as you have in theory paid any taxes due upfront, rather than having to complete the self-assessment process at the end of the financial year and pay your income tax in a lump sum. You still have a contract of employment with the agency and you still pay tax via PAYE rather than self-assessment at the end of the year.
 

Because it has the words 'agency' and 'PAYE' in its name, many agency workers - especially those just starting out in a contractor career - look to this as the default option for paying contractor income tax.
 

What do I have to do?


Your part in the process is very similar to working for an umbrella company. You carry out the work, complete time sheets and log them with the agency.


Again, this simplifies the admin for you, and the agency handles the necessary calculations to process your PAYE and pay over the appropriate salary.


How is agency payroll different?


Using agency payroll for PAYE has some crucial differences that can have a huge impact on your career and earnings, including:

•    The agency may dictate which contracts you can (and must) accept and when you must work.
•    Your tax code may change over time - you do not get the same level of continuity of employment.
•    You will not be able to claim back any legitimate business expenses like you can under an umbrella company.

These few differences alone add up to a major impact on your freedom to control your own career path, and can also affect your take-home pay and access to lending like loans and mortgages.


Is an umbrella company better than PAYE?
 

The correct answer to the frequently asked question "Is an umbrella company better than PAYE?" is that it will always depend on your individual circumstances, so it's a good idea to compare payroll solutions from MyPay+ such as our Umbrella, PAYE and Deemed Tax options, to choose the best fit for your needs.
 

However, there are some ways in which working under an umbrella company can be beneficial, for example if you want your period of employment as a contractor to be covered by a single continuous contract, rather than individual contracts for each job you work on.
 

You will also have a consistent tax code and will be in complete control of which contracts you accept and which you turn down - all while avoiding the admin burden of filing business accounts, arranging insurance and following any changes to tax legislation such as IR35 rules.

Is an umbrella company better for IR35?
 

If your work is found to fall within the scope of IR35, the legislation states that you should have PAYE withholdings in operation. This can be via a standard PAYE contract, or you can provide information via an umbrella company payroll solution instead.

Choosing an accredited umbrella company shows you that the umbrella provider works in compliance with the relevant legislation. For example, MyPay+ are Professional Passport certified and work hard to ensure all of our contractor payroll options are 100% compliant.
 

In a climate of ever stricter IR35 regulations, and with the onus of responsibility shifting to employers in recent years, working under an umbrella company reassures hiring managers that you are compliant and could mean the difference between landing the contract.

Is an umbrella company better for beginners?


Some of the biggest benefits of umbrella companies are for beginner contractors, as you can register in a matter of minutes, so there is no delay to starting work on your first contracts.

Working under an umbrella company gives you a simplified tax status and removes some of the admin burden mentioned above, again leaving you free to focus on your work in the early stages of your contractor career.

And you get a range of benefits similar to those you may have enjoyed in any previous employment - paid holiday entitlement and pension contributions, tax relief on business expenses, and deductions of PAYE income tax and National Insurance contributions as you go along, so you know your take-home pay is your own.

Find out more about MyPay+

To learn more about any of the above, or if you have an enquiry about our umbrella company payroll solution vs. agency PAYE or any other way of paying contractor tax, please get in touch and we will be happy to provide you with a quote and take-home pay estimate based on your personal circumstances.