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PAYE Or Umbrella - Which One Should You Select?

Choosing the right payroll is always confusing. As an employer, you must choose between  PAYE or Umbrella. These are your two main payroll options. But which one to go for – PAYE or Umbrella?

In this post, we will walk you through the meaning of the terms – PAYE and Umbrella. Plus, we will also explain how PAYE and Umbrella payroll concepts are different from one another.

So, let’s begin!

What is an Umbrella Company?

An Umbrella company provides temporary employment to contractors who work on fixed-term projects. The umbrella companies serve as the middle-man or intermediary between a contractor and the end client or agency.

Contractors working with an umbrella company will remain in employment even after their contract ends. Plus, even though the contractor is working on more than one assignment, their contract will continue with the company. 

What is an Agency PAYE?

PAYE or Pay As You Earn agencies employ contractors for specific contracts. In other words, a recruitment agency employs the contractor for a fixed period of a contract they have with their client. Here, the recruitment agency pays the contractor through its payroll.

PAYE, unlike umbrella payroll companies, does not offer continuous employment to contractors. Once the contract between the agency and the end client is completed, a contractor’s employment ends with the company.

What is the Difference Between PAYE and Umbrella Payroll Company?

You must consider several factors before you decide on selecting a PAYE or an umbrella payroll company. There are things like expenses, benefits, costs, HR support, etc. that you should look at before making a decision. 

This section will tell you the factors or aspects that you should look for in an umbrella company vs. PAYE. So, let’s see how these factors work. 

1. Cost

Mostly, there’s no cost related to working via agency PAYE. However, there might be different employment costs to cover. To cover this margin of costs, the agencies sometimes increase the contracted rates for contracts that choose to go for an umbrella.

It is necessary to change one thing between providers and that is the margin of an umbrella company. For example, an umbrella company might promise the contractors high take-home pay. But this might involve paying fewer taxes and National Insurance Contributions.

These schemes are often complex. By using such schemes, employers might actually be taking part in tax avoidance, which is not favorable. So, before you decide umbrella or PAYE, consider analyzing the cost that you have to pay. 

2. Expenses

Expenses are the second difference between PAYE and umbrella. However, contractors must know that they will be paid via PAYE whether they are an umbrella employee or an agency PAYE, contractor. But if a contractor is in employment with an umbrella company, they might have to pay for certain expenses related to work. 

Note: Allowable expenses are essential costs that are necessarily incurred during the performance of work. Examples – phone bills, stationery costs, travel costs, etc. 

3. HR support

If you think that internal HR support is not that important, you are wrong. Because it is!

What if employees face issues – like unfair dismissal, or pay-related disputes? They will need access to internal HR Support who will offer them professional guidance on these matters. However, the quality of support that employees get from HR might vary depending on the employer. Whether you choose to go for PAYE or umbrella payroll company, considering the possibility of difficult periods is a must. 

For example, an end client pays an agency. But an umbrella company earns its income from the contractor. So, it may be easier for them to take action in your best interests. 

4. Employee benefits

Whether you choose PAYE or an umbrella payroll company, you will need to employ the contractors through the agency. The agency PAYE or umbrella company will look into your payroll and admin. Plus, under both payroll options, the contractor will be taxed under PAYE. 

Between umbrella company vs PAYE, an umbrella company will continue to be a contractor’s employer whether the contract still remains in place. The contractor’s employment will continue even when you are applying for loans, mortgages, etc. But in the case of employing an agency PAYE, the contractor will have different employment altogether.

As an employer, you might need to provide access to medical plans, pension schemes, offers, discounts, or even support for insurance, mortgages, etc. to the contractors.

6. Take-home pay

This is one of the aspects that contractors should consider before choosing PAYE or umbrella. In an umbrella company, a contractor’s daily or hourly rate agreed upon by the agency includes a margin for the umbrella. But in the case of PAYE, the rate would not include these costs because the agency pays them separately. So, considering PAYE rate vs umbrella rate, an umbrella rate should be higher. 

However, take-home pay for the contractors in an umbrella company is mostly higher, it could be lower or about the same with PAYE. The difference here depends on the different rates offered, how many days the contractor works, and how much the umbrella retains as a margin. 

Self-assessment (Alternative to Umbrella and PAYE)

Other than PAYE or umbrella payroll, you have an alternative which is self-assessment. If you consider PAYE vs self-assessment, there’s no difference in income tax rates. The rates are the same in both cases (personal allowance, basic rate, additional rate, higher rate).

The difference in taxation is when and how you will pay the taxes. PAYE is paid before the contractor gets their wages. Whereas, in self-assessment tax, the employer must pay what the contractor owes for a given period like a month, quarter, or a year. It means that you will pay the contractor first and then the contractor has to work out the taxes owed and file it themselves. 

Self-assessment can be tricky at times since there are tax calculations involved and not everyone is pro at calculating taxes. Hence, a lot of self-assessment contractors, avail the services of an accountant.

Besides, the tax-related difference, self-assessment has another difference with PAYE and umbrella payroll companies. Unlike PAYE and umbrella payroll companies, in self-assessment, the contractors who operate under a limited company have no access to statutory benefits. This is because the company does not employ them. For example, if a contractor unexpectedly falls sick or needs leave, their contractor fee will cover the costs. Simply said, the contractor will have to bear the costs.  

So, when choosing between PAYE vs umbrella company, the employer has another alternative of self-assessment to look out for. Consider the differences, mainly benefits and costs, and choose the solution that suits you best. 

Simplify your Payroll Decisions with Multiplier 

Are you still on loggerheads and can’t make a payroll decision? Let Multiplier’s Employer Of Record (EOR) solution help you out. Here’s why you should consider using this: 

  • ~It helps you scale globally with prompt global talent acquisition features 
  • ~It supports you throughout to find the profiles that match your requirements 
  • ~It gives you the freedom to experiment in new markets without any risks 

Want to know more? Book your free demo now!

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