Agency PAYE vs Umbrella Company – which is the best option for you?

As a contractor about to start your very first contract you’ll have a couple options, to be paid through a recruitment agency or register with an Umbrella Company. You’ll need to decide which option is right for you as it’ll determine how you get paid.

In this blog we explore your options for both solutions, to help you decide which is the best for you.

Understanding PAYE

Just like employees who are in permanent employment, PAYE (Pay As You Earn) is a way of ensuring HMRC are paid the Income Tax and National Insurance Contributions (NICs) they’re due, then you’re paid the remaining net amount. By receiving PAYE through either your Umbrella Company or recruitment agency, you effectively become an employee of them, and therefore also receive employment rights such as maternity and sickness pay.

The amount of NICs and tax you’ll pay whether you’re using a recruitment agency or an Umbrella Company are exactly the same, so what’s makes them different? Keep reading to understand fully.

Agency PAYE

Once you’ve signed up to agency PAYE you will become an employee, and it’s their job to support you should you have any issues regarding any element of your employment, just as your employer did when you were in permanent employment.

Traditionally they do not charge a fee for their services, but you may receive slightly less than you would if you used an Umbrella Company as an agency may charge you a larger admin fee.

Once you’ve decided to use an agency you’ll only need to submit your signed copy of your contract before you begin a new position, and submit your weekly or monthly timesheet. Once the client has paid the agency they will then deduct your tax and NICs, ensuring you’ll never be on the wrong side of the taxman.

Why might agency PAYE not be right for you?

If you have multiple contracts throughout the year or have the possibility to work on more than one at any time, then choosing an agency may not be the right option for you. This is because when you contractor via agency PAYE they tend to only favour contracts they source themselves from certain clients, which of course can dramatically reduce your freedom to choose who you work for, and thus removing the freedom of contracting.

Agency PAYE is considerably easier than using an Umbrella Company and offers you a quick fix solution if you’re just starting out, but certainly carries reduced benefits. If you’re looking for a solution that is better suited to your needs and is able to offer greater benefits, then using an Umbrella Company may be the right solution for you.

Umbrella Companies

Just as per agency PAYE an Umbrella becomes your employer, and will pay your PAYE on your behalf. When you use an Agency PAYE system you may only be able to choose contracts which are available through that agency, whereas by using an Umbrella you’re free to choose contracts from multiple clients and sources.

When using an Umbrella you’re also classed as an employee, so regardless of how many contracts you may have at any one time, you’ll still have just the one employer. Plus, as you effectively ‘keep’ your employer during this process, your tax code won’t be negatively affected and also simplifies your tax as a whole, as with only one tax code and one P60 it’s much easier to prove your income should you need to (such as when applying for a mortgage for example).

What does it cost to use an Umbrella Company?

Umbrella Companies charge a fee for their services, as they’re traditionally run by specialist accountants who understand the complex needs of contractors and freelancers. This fee also covers the cost of their administrative duties, such as managing any expenses you have, processing payroll and raising invoices with your clients. As you’re also an employee they must provide pension contributions, paternity and maternity pay, sickness and annual leave pay, and other employee benefits.

The Umbrella will deduct their fee prior to your pay being taxed, which is usually between £20 and £35 per week. Here at SG Umbrella we only charge £20 per week, or £78 per month, so our fees are well priced against our competitors. Whilst the additional cost of having someone manage your PAYE could be seen as an ‘extra’ you might not need, it’s worth understanding the value using an Umbrella Company can provide, and the fact that the cost to ensure your PAYE and other obligations are taken care of, along with ensuring you get what you’re entitled to, is well worth the investment in finding one that works well for your personal and professional needs. Take a look at what SG Umbrella offers its Umbrella clients, and how we can help you.

Stay safe – always use an FCSA accredited Umbrella Company

Tax avoidance schemes amongst Umbrella Companies are rife, and it’s easy to see why people fall for their charms. With the promise of reduced tax and unusually high rates of take home pay, for a new contractor it can offer the answer they’re looking for, without providing all the necessary information.

So how do you tell the real umbrellas from the fake? The FCSA (Freelancers and Contractors Service Association) is the UK’s leading membership body that’s dedicated to raising standards and promoting supply chain compliance for the temporary labour market. When an Umbrella Company is FCSA accredited it has been annually audited to ensure it’s compliant with UK tax law and regulations, so you can rest assured knowing that it follows the highest levels of compliance, and has met the FCSA’s rigorous standards to provide contractors with a reliable and compliant service. Here at SG Umbrella we are proud to say that we are FCSA accredited, and you can read more about it here.

How can SG Umbrella help?

If you decide to use an Umbrella Company over an Agency PAYE, then we can help. With FCSA accreditation, fast payments, complete compliancy and unlimited direct advice from our expert contractor accountants plus the ability to switch to our Limited Company services whenever needed, we really do have everything you need in one place, to become a contracting success. Find out more today.