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.

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Guide to Umbrella Company Pensions

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To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.


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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.

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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.

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


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