Umbrella Company vs PAYE: What should you choose?

How to choose between PAYE and Umbrella

What is an umbrella company?

Before we compare PAYE vs umbrella, let us first look at each option in more detail and what each entails.

An umbrella company employs a contractor and therefore takes certain tasks off their hands such as invoicing the client, chasing payments, paying them a salary and working out and deducting the correct level of tax and National Insurance through the PAYE system.

The PAYE system simply refers to pay-as-you-earn which is the most common form of taxation in the UK and is paid by most UK employees.

Under the PAYE tax system, the current tax bands are as follows:

  • Personal allowance (tax-free) – Up to £12,500 a year
  • Basic rate (20%) – £12,501 to £50,000 a year
  • Higher rate (40%) – £50,001 to £150,000 a year
  • Additional rate (45%) – More than £150,000 a year

If you live in Scotland, the income tax rates are slightly different as follows:

  • Personal allowance (tax-free)– Up to £12,500 a year
  • Starter rate (19%) – £12,501 to £514,585 a year
  • Basic rate (20%) – £14,586 to £25,158 a year
  • Intermediate rate (21%) –£25,159 to £43,430 a year
  • Higher rate (41%) – £43,431 to £150,000 a year
  • Top rate (46%) – more than £150,000 a year

The PAYE system in Wales is based on the following tax bands:

  • Tax-freePersonal allowance: up to £12,500 per year
  • Basic rate (20%):£12,501 – £50,000 per year
  • Higher rate (40%):£50,001 – £150,000 per year
  • Additional rate (45%):over £150,000 per year

As the company’s employee, umbrella company contractors also qualify for statutory rights such as sick pay, paid holiday leave, a workplace pension and maternity or paternity leave.

Find out more about umbrella sick pay and other statutory rights in our handy guide.

Contractors can still choose which contracts they work on and when, but they don’t have to deal with the tasks and finances of running their own business like self-employed contractors do through a limited company.

What is a PAYE agency?

A PAYE agency also employs the contractor, however they dictate which contracts the contractor must work on and when.

Under a PAYE agency, just like with an umbrella company, the contractor will also be paid a salary and have their tax deducted and paid according to PAYE tax bands. They will similarly qualify for statutory benefits and have general admin tasks taken care of for them.

So what is the difference between PAYE and umbrella?

The main differences between PAYE and umbrella include:

Who chooses your contracts

One significant difference between the two options is who chooses which contracts the contractor will work on and when.

Whereas with an umbrella company the contractor is free to source and select which contracts they work on and with which clients, a PAYE agency will make this decision for the contractor.

For this reason, contractors that wish to be in charge of their own career development and progression usually opt for the umbrella route.

Continuity of employment 

With a PAYE agency every new contract the contractor takes on is a separate run of employment. On the other hand, with an umbrella company your employment will continue from contract to contract, meaning one handy tax code.

This makes life easier when doing things like applying for a mortgage or loan.

Expenses

Another difference between PAYE and umbrella is whether you can claim tax relief on work-related expenses.

The good news is that most umbrella companies will allow contractors to claim for expenses which can reduce the amount of tax you need to pay. However, PAYE agencies don’t usually offer this option.

There is also a third option – limited company. To find out more about umbrella vs limited company and the pros and cons of each route check out our guide.

Which route is best for me?

Having looked at the key differences between PAYE vs umbrella, it’s time to make a decision about which route is best for you.

It is worth noting that both the PAYE and umbrella options process tax through PAYE, however, umbrella companies do allow contractors to claim business expenses which can reduce the amount of tax paid.

Contractors should also look at the degree of freedom and flexibility they want over their careers.

If the ability to choose which contracts you work on and which clients you work with is important to you, umbrella is the best way to go. After all, with an umbrella company contractors are free to progress their careers and move forward at a pace that’s right for them, unlike with a PAYE agency which dictates which contracts you will work on.

Thousands of contractors select the umbrella company route as a way to combine the security and stability of employment with the benefits of being self-employed and being able to choose which contracts you work on.

If you’ve weighed up your options and decided that umbrella company is the way to go, Umbrella Supermarket is here to help you find the best umbrella company for you.

Ready to find the best umbrella company?

Our handy umbrella calculator makes it quick and easy for contractors to find the best umbrella company for their needs and requirements.

After all, there are hundreds of umbrella companies out there competing for your custom which can make it confusing to know which company is the best to work with.

That’s where our contractor calculator comes into play. By simply entering a few details about yourself, such as your contractor rate and requirements, our umbrella calculator will generate a list of the best umbrella companies for you.

Why not see what our umbrella calculator can do for you today?

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