Is PAYE Better Than Umbrella?

Should I go PAYE or Umbrella?

What is PAYE?

Before you make your decision, you should know exactly what each option entails in order to find the best one for you.

Firstly, we’ll take a look at the PAYE option.

PAYE stands for pay-as-you-earn. This is the most common way of paying tax in the UK, with most employees paying tax in this way. Self-employed workers are usually the exception to this as these workers instead pay tax through self-assessment only after they have received their income.

It’s important to note that contractors will be subject to the same tax bands whether they work through PAYE or umbrella in line with current tax bands.

Find out more about UK tax bands and what you will pay in this government guide.

Therefore, the main differences between PAYE and umbrella don’t lie in how much tax the contractor will pay.

So, how are the two options different?

Who chooses what contracts you will work on?

One of the main differences between PAYE and umbrella is how the contractor will work through each.

Whereas with an umbrella company contractors are free to choose what contract work they take on and when they do it, with a PAYE agency, contractors do not have the freedom to choose.

This means that PAYE agency contractors will be told which work they must do, with which clients and when.

Although some contractors prefer this option as it gives them a level of security, most contractors prefer the freedom and flexibility to choose their own work. This allows contractors to develop their careers at a rate that’s right for them, and go after high-value contracts with their preferred clients.

Who can claim expenses?

Another key difference between the two options is who can claim expenses.

It is usually the case that umbrella company contractors are able to claim back business expenses. These expenses must be legitimate business expenses that have been accrued on the project.

This is great news for umbrella company contractors, however, as it means that these expenses can be offset against their tax bill.

This is in contrast to PAYE agency contractors, however, who are unable to claim back expenses and therefore don’t benefit from this.

Who gets continuity of employment?

Another difference between PAYE and umbrella is continuity of employment.

Umbrella company contractors are given continuity of employment. This means that they will receive one handy tax code, which can make things like getting a loan or mortgage a whole lot easier. This is because the umbrella company employs the contractor, so although they may work on a number of contracts throughout the year, they still benefit from just one tax code.

PAYE agency contractors, on the other hand, do not receive continuity of employment. This means they will receive several tax codes throughout the year. As we have mentioned, this can make things like getting a mortgage more complicated, which is considered a drawback by many.

Who qualifies for statutory benefits?

Another benefit to contracting through an umbrella company over a PAYE agency is that umbrella contractors qualify for statutory benefits.

This means that umbrella contractors receive:

  • Sick pay for up to 28 weeks of the year
  • Paid holiday leave for a minimum of 28 day’s per year or the pro rata equivalent
  • Maternity pay for up to 33 weeks
  • Paternity pay for 1-2 weeks
  • A workplace pension

Just as it sounds, this is great news for umbrella contractors who can rest assured that they will still receive income should they fall ill or need to take a break.

PAYE agency contractors do not qualify for statutory benefits, however. In essence, if a PAYE contractor does not work, they do not get paid. This is seen as a significant drawback to this option for many.

Insurance cover

The final difference between PAYE and umbrella that we will look at is insurance.

With an umbrella company, the contractor will be covered by the necessary insurance they need when contracting.

Every umbrella company is legally obliged to have employer’s liability insurance which protects the contractor if they fall ill or become injured on the contract.

Further to this, many umbrella companies also provide the contractor with professional indemnity insurance and public liability insurance.

This is great news for umbrella contractors as it means they do not have to worry about organising and paying for this insurance out of their own pockets.

PAYE agency contractors are not covered by such insurance, however, and will therefore need to organise setting this up themselves. Again, this is seen as a disadvantage to the PAYE option.

After reading our key differences between PAYE and umbrella, if you have decided that umbrella is the best route forward for you, you will now need to find a company to work with.

That’s where Umbrella Supermarket come into play.

Find the best umbrella company with Umbrella Supermarket

Now you’ve decided that umbrella company is the best move for you, the next step is to find a company that’s the perfect match for you and your contracting needs.

To do this, simply head over to our umbrella calculator and we will do the rest.

Having input your details and preferences, we will show you a list of the most suitable umbrella companies for you, outlining the services you will receive, how much they charge in fees and we will even show you what your payslip will look like under each one.

Try it out for yourself today and take the first step to finding the best umbrella company out there.

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