Umbrella PAYE, agency PAYE or a limited company: which is best for contractors?
If you’re a contractor and you begin work through a recruitment agency, you’ll be offered a choice of payment structures. This includes agency PAYE and umbrella PAYE, each of which has unique benefits. Alternatively, you may decide to set up your own limited company.
Read on to discover what each of these options are and what they mean for you.
The options and who they are suitable for
Agency PAYE refers to being added onto the agency’s payroll. This means you will work for and be paid by the agency, who will make any relevant deductions. This is the best option if you’re seeking occasional temporary jobs, such as bar work, as each contract is treated separately. Some offer ‘pay between assignments’ contracts for any gaps between projects, but it’s worth assessing the pros and cons of these.
Your agency may refer you to an umbrella company that will pay your salary on their behalf. You become an employee of the umbrella company which means you gain some great employment benefits as a result. An umbrella company is ideal if you’re working on several short-term assignments with various agencies, and you’re looking for continuous employment. Find out more about what an umbrella company is.
A limited company is a popular business structure in the UK. It allows you to create a business as a separate entity, meaning you and any shareholders keep your personal finances protected should the business fail (unlike a sole trader status). It’s the most tax-efficient option, meaning it’s a good choice if you earn more than £35,000 a year and you’re willing to take more responsibility for your finances.
The differences between agency PAYE, umbrella PAYE, and a limited company
Taxes and compliance
- Both agencies and umbrella PAYE cover tax returns, compliance with IR35, and accounts. As you are employed and paid through PAYE, you will have no financial responsibilities aside from submitting timesheets.
Take home pay
- Your salary through an agency will vary in comparison to an umbrella company. While there is the benefit of no admin charges, you are not eligible for as many expense claims under agency PAYE.
- Umbrella companies will calculate any tax relief on allowable business expenses, which could result in increased pay. However, umbrella companies take a margin for their service and benefits so it’s worth weighing up the options. Some agencies may uplift your contracted rate to cover these costs.
- As a limited company, you’ll receive greater financial protection. You will be paid by the agency B2B and not as an employee, meaning you’ll take home more pay due to no employee-related deductions.
- Umbrella and agency PAYE give you access to certain statutory benefits including sick pay and parental leave. Better ones provide cover for you to complete your work. Also, if the work is subject to IR35, umbrellas and agencies are best for keeping you covered.
- An umbrella company may provide additional perks like health insurance, life cover, and accident cover. Other benefits may include access to insurances like professional indemnity and public liability, plus the ability to claim costs and expenses. As you will have one tax code regardless of the number of agencies you work for, this means you’ll have a set pay day, one tax code, one pension pot, and one P60.
- As you are not an employee as a limited company, you will not receive the above worker benefits. This also means you will not receive holiday pay.
- If you’re on an agency’s payroll, you are considered an agency worker and every project you complete will be under a new contract. This means you could face gaps in your employment between jobs, and all projects will be selected by your chosen agency.
- Under an umbrella company, you will be considered an employee. A huge benefit of this is that you will be under a contract of employment, regardless of the number of projects you take on. This means you will have a record of continuous employment, ideal for mortgage and loan applications. Your employer will always be the umbrella company, and not the different end clients you work with. Ultimately, you will be able to operate with more freedom.
- If you set up a limited company, you will be the director of your business. This means you will receive business-to-business (B2B) payment, as opposed to being on an agency’s or umbrella company’s payroll.
- Working with an agency is easy as it cuts out any third parties, plus they will work out any deductions and benefits on your behalf. To get started, you simply provide your details via an application form with supporting documentation. When you begin work, you’ll need to log expenses and timesheets so your pay can be calculated.
- Signing up to an umbrella is simple and can take a matter of minutes. You’ll just need to include details of your umbrella company in your agency application. Once you’re set up, you remain employed across different contracts. Like an agency, your tax deductions will automatically come out of your salary, so you won’t have to worry about these yourself. You’ll also only need to provide timesheets and expenses.