How to Choose Between PAYE or Umbrella

PAYE or Umbrella: Which is best for me?

Option 1: Umbrella Company

Before you decide, you will first need to look at each option in detail to see which best fits in with your contracting needs and lifestyle.

Let’s start by looking at what an umbrella company is and how they work.

An umbrella company employs the contractor. In turn, they are responsible for a range of tasks on the contractor’s behalf.

These include:

  • Invoicing the client
  • Chasing any late payments
  • Collecting the fee from the client
  • Processing the fee through the PAYE system, paying HMRC correct levels of tax and National Insurance on the contractor’s behalf
  • Processing any expenses
  • Paying the correct amount to the contractor
  • Providing statutory rights to the contractor, including holiday pay, sick pay, maternity/paternity pay, and a workplace pension
  • Providing correct insurance cover to the contractor

As we have mentioned, under an umbrella company, the contractor's pay is processed through the PAYE system. This is the most common form of taxation in the UK and is how most payroll workers pay tax.

The exception to this would be off-payroll workers, such as those that are self-employed, who pay tax through self-assessment retrospectively once they have been paid by the end client.

Find out more about how an umbrella company works in our helpful guide.

So how much tax do umbrella company contractors pay?

PAYE tax bands in 2021

In line with UK tax bands, umbrella contractors will pay the following levels of tax in the financial year 2021 – 2022:

  • Personal allowance: contractors will pay 0% up to £12,570
  • Basic rate: contractors will pay the basic rate of 20% between £12,571 and £50,270
  • Higher rate: contractors will pay the higher rate of 40% if they earn between £50,271 - £150,000
  • Additional rate: finally, contractors will pay the additional rate of 45% if they earn over £150,000. Employees are not entitled to a personal allowance on taxable income over £125,140

If you are a contractor based in Scotland, you will be subject to different tax bands, which you can find here.

That’s how an umbrella company works and how much tax the contractor will pay under one, so what about a PAYE agency?

Option 2: PAYE

A PAYE agency is similar to an umbrella company in several ways.

Firstly, a PAYE agency also employs the contractor. This means that a PAYE agency will also take on tasks including invoicing the client for the contractor, collecting their fee, processing it through the PAYE system, deducting tax and National Insurance before paying the contractor the correct salary.

This means that a contractor will pay the same amounts of tax whether they choose to operate through an umbrella company or a PAYE agency.

For this reason, income shouldn’t be a deciding factor when making the decision between the two.

However, there are several significant differences between umbrella and PAYE which a contractor does need to consider.

Next, we will look in more detail at these differences.

Umbrella vs. PAYE: What are the differences?

The first big difference between umbrella and PAYE is how the contractor operates.

Under an umbrella company, the contractor has the freedom to choose which contracts they take on.

Many contractors see this as a significant benefit to working with an umbrella company as it means they get more freedom over their careers. Being able to choose what work they take on, the contractor can go for high-value contracts with their chosen clients. This means they are more in control of their career progression and development and can progress at a rate that’s best for them. It also means they can take contracts on at a time that suits them.

This is in contrast to a PAYE agency, under which a contractor is told which contracts they will work on and when. Just as it sounds, with this option, the contractor is not granted as much control over their careers and might end up working on projects that aren’t beneficial to their careers.

Another difference between PAYE and umbrella is continuity of employment.

With an umbrella company, the contractor's employment continues from contract to contract. This makes the contractor gets one easy tax code. This is very helpful when it comes to things like applying for mortgages or loans.

With a PAYE agency, however, each new contract is classified as a separate run of employment. As we have mentioned, this can be a major drawback for the contractor’s finances.

Finally, the ability to claim expenses also differs between umbrella and PAYE.

With an umbrella company, the contractor can claim work-related expenses which can be offset against their tax bill. PAYE agencies, however, don’t tend to allow this.

Now you’ve weighed up your options between PAYE and umbrella, if you’ve decided that an umbrella company sounds like the best fit for you, the next step will be to find a provider.

That’s where Umbrella Supermarket can help.

Ready to find an umbrella company that's the right fit for you?

Many contractors will choose to go with an umbrella company. After all, they offer a range of benefits to the contractor, whilst allowing them to do things a PAYE agency does not, such as claim expenses, have continuity of employment and choose their own contract work.

However, there are lots of umbrella companies out there competing for your custom, so it’s important that you find the right one. After all, not all umbrella companies are created equal.

That’s where our umbrella calculator comes in handy. We let contractors input their details in order to find a list of the best-suited umbrella providers for them. Give it a go yourself today to find the best umbrella company for you.

Would you like more information on How to Choose Between PAYE or Umbrella?

Explore More Resources

using an umbrella company

Beginner’s Guide to Using an Umbrella Company

If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.

After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.

 

PAYE and Umbrella

Guide to PAYE vs. Umbrella

PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.

To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.

Holiday Pay for Umbrella Contractors

Complete Guide to Holiday Pay for Umbrella Contractors

One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.

To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.

umbrella company

When Shouldn’t You Use an Umbrella Company?

Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.

One way that contractors can work is through an umbrella company.

Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?

To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.

umbrellas

The truth about HMRC approved Umbrella Companies

There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.

After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.

However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.

To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.

umbrella company costs

How Much are Umbrella Company Costs?

If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.

To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.

 

date rates vs hourly rates

Should contractors choose hourly or daily rates?

There are many decisions a contractor must make in their career. One important one is whether to charge daily rates or hourly rates.

Each option has its own pros and cons and will have a different impact on contractors.

Therefore, it’s important that every contractor does their research to find out which option is best for them.

In this guide, Umbrella Supermarket looks at hourly rate vs daily rate and the benefits and drawbacks of each, to help every contractor find the best route forward for them.

 

public sector private sector contractors

How to choose between public sector vs. private sector for contractors

Every contractor must make the decision about whether to work in the public sector vs private sector.

Operating in the public or private sector can have a big impact on the contractor’s career, including on what types of contracts they will work on, who they will work with to whether they will fall under IR35.

This is especially true since changes to IR35 legislation were rolled out in April this year which have had a significant impact on private sector contractors.

If you are debating between contracting in the public sector vs private sector, Umbrella Supermarket are here to help. In this guide, we outline the key differences between the public and private sectors and what effects this will have on contractors.

contractor options

Complete Guide to Contractor Options

Contracting has become an increasingly popular way of working in recent years. If you have decided that the time is right to begin your contracting career, one of the first questions you will ask yourself is how you will operate.

How they operate is one of the main decisions contractors must take which will have a big impact on your day-to-day contracting life.

After all, there are a number of ways you can work, including through an umbrella company or by being self-employed.

In this guide we look at umbrella company contracting vs self-employed contracting and the main advantages and disadvantages of each, to help you make the right decision.

 

Statutory payments

Statutory payments for contractors explained

Contractors can choose to work on a self-employed basis through their own limited company, or through an umbrella company as an employee of the provider.

Thousands of contractors choose the umbrella route. After all, there is a range of benefits to operating under an umbrella company, including receiving statutory rights.

If you are considering becoming an umbrella contractor in 2021 and want to know more about statutory payments for umbrella contractors, Umbrella Supermarket has put together this handy guide outlining everything there is to know.

comparing umbrella companies

What To Look Out For When Comparing Umbrella Companies

Working through an umbrella company has become an increasingly popular option for contractors in the UK.

An umbrella company makes contracting easy and hassle-free for contractors, saving them headaches on everything from tax, payroll, insurance to dreaded IR35.

However, with are so many umbrella companies out there, choosing the perfect one for you is no easy task.

To help, Umbrella Supermarket have put together this handy on what to consider when comparing umbrella companies, so you can find the best one in 2021.

umbrella company

How Does an Umbrella Company Work?

In light of recent IR35 reforms that came into force in April 2021, many limited company contractors are now thinking about making the move to Umbrella.

However, understandably, many will want to know more about umbrella companies and how they work before taking the leap.

To help these contractors decide whether Umbrella is the best move for them, Umbrella Supermarket have put together this ultimate guide on everything there is to know about umbrella companies in 2021.