Guide to PAYE vs. Umbrella

How to decide between PAYE and Umbrella

What is PAYE?

Let’s start by looking at the first option – PAYE.

PAYE refers to the pay-as-you-earn way of paying income tax. This is how most workers in the UK pay their tax contributions unless they are off-payroll workers such as the self-employed.

Anyone who pays their tax through the PAYE system will do so in line with the current UK tax bands:

  • Tax-free Personal allowance: up to £12,570 per year
  • Basic rate (20%):£12,571 – £37,700 per year
  • Higher rate (40%):£37,701 – £150,000 per year
  • Additional rate (45%):over £150,000 per year

It is worth noting that tax bands differ throughout the UK depending on whether you are based in England, Wales, Scotland or Ireland. You can check out the different tax bands in this government guide.

When a contractor refers to working PAYE, they are employed by a PAYE agency. This means they will be paid through the PAYE system.

What is an Umbrella company?

The other option is to choose an umbrella company.

With this option the contractor also becomes an employee of their chosen umbrella company and will pay tax through the PAYE system.

Although both PAYE and umbrella are similar in these ways, they differ in a variety of ways. Next, we will look at the differences between each, so contractors can take the right path for them.

PAYE vs Umbrella: What are the differences?

Statutory benefits

One key difference between PAYE and umbrella is the contractor’s entitlement to statutory rights including holiday pay, sick leave, a workplace pension and maternity or paternity leave.

Under an umbrella company, as the company’s employee, the contractor qualifies for statutory rights should they fall ill or want to take a holiday.

Just as it sounds, this is considered a massive benefit by thousands of umbrella contractors giving them a well-needed safety net.

However, with the PAYE agency option contractors don’t receive these statutory benefits.

This is a clear drawback of the PAYE agency route and means that if the contractor can’t work due to illness, or just wants to take some time off, they will not be paid for this time out of work.

How the contractor works

The next main difference between both options is how the contractor works and operates under each.

After all, with a PAYE agency contractors are told which contractors they will be working on and when. This means that contractors have no choice over the types of contracts they take on and which clients these contracts are with.

Some contractors see this a major drawback as it means they have less freedom and flexibility in their careers and can't go after better paying contracts if they wish to.

Umbrella company contractors, on the other hand, are free to make these decisions themselves. The ability to choose their own contract work gives umbrella company contractors more control over their contracting careers and means they can progress at a speed that’s right for them.


Another difference between PAYE and umbrella is who can claim expenses.

It is usually the case that umbrella company contractors are able to claim business expenses back. As these costs are considered a legitimate business expense by HMRC, this is a big bonus for umbrella company contractors as they can be offset against their tax bill.

With PAYE, contractors can’t usually claim their expenses back, meaning these contractors don’t benefit from this tax relief.

Continuity of employment

The final key difference between PAYE and umbrella is continuity of employment.

Umbrella companies give contractors continuity of employment. This means that although the contractor might work on several different contracts in a year, this is considered as one run of employment meaning the contractor receives one handy tax code. This comes in useful for things like applying for a mortgage or getting out a loan.

On the other hand, PAYE agencies don’t provide contractors with continuity of employment. This can make things tricky and confusing and also hinders the contractor’s ability to borrow money.

The third option – self-assessment

When looking at PAYE vs umbrella, it’s important to consider that there is also a third optionself-assessment.

This is when the contractor works as a self-employed person meaning how they operate and pay tax will differ.

Although the tax bands are exactly the same whether you choose PAYE, umbrella or self-assessment, the main difference is how and when you pay this tax.

Whereas with the PAYE route contractors will pay tax owed before they get their salary paid through, with self-assessment tax is paid after the contractor receives their fee. This works in that the contractor is paid their fee by the client and then must then work out how much tax and National Insurance they owe.

Just as it sounds, self-assessment can often be tricky and time-intensive, meaning many of these contractors will end up paying for the services of an accountant.

For the reasons stated above, many contractors will opt for the umbrella company option. In fact, umbrella companies have become more and more popular over recent years. If you would like to join the thousands of umbrella company contractors, the next step is to choose an umbrella company for you.

Find an umbrella company with the help of Umbrella Supermarket

Simply head over to our umbrella company calculator, enter a couple of key details and we will show you a list of the best-suited umbrella companies for you.

We only ever work with the best, most reputable companies out there, so you know you’re choosing the right one for you. Ready to give it a go for yourself?

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Decision Making

Is PAYE Better Than Umbrella?

If you are considering contracting you will need to decide on PAYE or umbrella.

It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.

To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.

using an umbrella company

Why Should Contractors use an Umbrella Company?

There are many reasons that contractors across the UK opt to work under an umbrella company.

Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.

For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.


umbrella company fees

Does an Umbrella Company Charge Fees?

Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.

In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.


What makes a good umbrella company

What Makes a Good Umbrella Company?

If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.

After all, there are lots of umbrella companies out there, so how do you know which one to choose?

To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.

umbrella company pensions

Guide to Umbrella Company Pensions

One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.

In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.

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


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.


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.


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.


Choose Between PAYE or Umbrella

How to Choose Between PAYE or Umbrella

Every contractor faces the decision between PAYE or umbrella, but how do you know which is the best option for you?

After all, PAYE and umbrella both have key differences, meaning contractors should do their research to find the best path for them.

Thankfully, Umbrella Supermarket is here to help. In this guide, we take a look at PAYE vs. umbrella, explaining what you should know before making the all-important decision.