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.

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?

 

An alternative to umbrella companies is to be employed directly by an agency and allow them to calculate your PAYE and NI deductions - so what's the difference?

                     

In this scenario, you are placed on the agency payroll and they become your legal employer, taking responsibility for paying you the money you earn, less any appropriate tax and other deductions.

 

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.

 

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.

Need help to decide?

 

If you still have any questions about the difference between umbrella companies and PAYE, email MyPay+ on info@mypayplus.co.uk or call us on 01925 912200 and a member of our team will be happy to discuss our Solutions with you.

How does agency payroll work for PAYE?

 

An alternative to umbrella companies is to be employed directly by an agency and allow them to calculate your PAYE and NI deductions - so what's the difference?

                     

In this scenario, you are placed on the agency payroll and they become your legal employer, taking responsibility for paying you the money you earn, less any appropriate tax and other deductions.

 

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.

 

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.