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Umbrella Company vs Agency PAYE

What's the difference?

Understanding the difference between an umbrella company, such as PayStream's My Max, and an agency payroll (PAYE) can be difficult so we thought we would explain the key differences to you. For example, do you know which one supports contributions into your personal pension through a salary sacrifice arrangement saving you £100’s in not only PAYE but also in National Insurance each month?

Why choose to work through an umbrella company? 

Our Lead Accountant, Vicky, explains what benefits you can enjoy by choosing to work through an umbrella company in under a minute.

Umbrella Company

PayStream's My Max umbrella service

Agency Payroll

Pay As You Earn (PAYE)
Ability to claim tax relief on allowable business expenses as they are incurred
Continuous employment across all your contracts if working with multiple agencies
Ability to supports contributions into your personal pension through a salary sacrifice arrangement
One pension pot across all of your contracts if working on multiple agencies
Employed under a contract of employment
Access to statutory sick pay
Access to statutory maternity or paternity pay
Access to statutory adoption pay
Access to comprehensive insurance package of employers liability, public liability and professional indemnity
Access to employee rewards scheme
Access to statutory bereavement leave
Access to statutory shared parental leave
Access to Online GP service at discounted price
Access to Personal Accident cover at discounted price

Umbrella company

The simplest way to describe an umbrella company is that you become an employee of the umbrella company. This means that the agency will pay the umbrella company, who then after deducting all of the necessary PAYE and NI contributions pay the contractor their salary. Take a look below to see the key features of an umbrella company:

Agency PAYE

Pay As You Earn (PAYE) is when the agency is the contractor's employer and is responsible for paying them. The agency must deduct employed levels of tax and NI contributions are calculated and paid before the contractor receives their salary. Take a look below for some of the key features of PAYE:

  • One of the differences, as mentioned above is that the umbrella company will make the necessary deductions and also calculate any tax relief on allowable expenses, where the contractor isn't subject to supervision, direction or control, this can result in an increase in take home pay.
  • Very little admin to do and the contractor simply submits their timesheets and logs expenses online.
  • The contractor will enjoy a continuous employment record which is handy for mortgage and loan applications. 
  • Access to statutory benefits and inclusive insurances, this means the contractor can do what they do best knowing they are covered. 
  • A good umbrella company, like My Max, will give contractors access to a free employee rewards scheme and other benefits like in-house financial advisors.
  • The agency is the contractors employer and therefore is responsible for paying the contractor.
  • Employed levels of tax and NI is calculated and paid.
  • The contractor submits their timesheets to the agency.
  • The contractor has access to certain statutory benefits, like statutory sick pay.
  • Tax relief on any expenses is not available.

Umbrella Company vs Agency PAYE FAQs

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In the UK, an umbrella company directly employs contractors and freelancers who work inside the IR35 regulations. Generally, an umbrella company's services are administrative and accountancy-based - such as managing timesheets, calculating PAYE tax and NI contributions, invoicing the client, collecting monies and paying the contractor.

If you were to follow the agency payroll route, you essentially become an agency worker and they are responsible for making all of the necessary deductions and paying you your salary.

The first difference is that when an umbrella company is carrying out the necessary deductions, they will also calculate any tax relief on any allowable business expenses where the contractor isn't subject to supervision, direction or control. This could mean an increase in take home pay. So, where eligible, contractors working through an umbrella company simply need to submit their timesheets and log their expenses online.

The next big difference is the additional benefits you get when working through an umbrella company. With both an umbrella company and agency payroll you will have access to certain statutory benefits including sick pay. However, an umbrella company will employ you under a contract of employment so whether you carry out one assignment or 100 you'll be employed under the same contract, giving you a record of continuous employment which helps with mortgage or loan applications. It also helps to ensure that you're on the correct tax code whilst providing you with just one pension pot.

You will also have the added benefit of an inclusive insurance package, something you won't get if you were to be paid via agency payroll.

The way an umbrella company works is pretty simple. A contractor becomes an employee of the umbrella company. This means that the agency will pay the umbrella company an umbrella rate, the umbrella company will deduct its costs (such as its umbrella margin, Employer’s NI, Apprenticeship Levy and holiday pay) and the remaining amount is then payable to the contractor as gross pay. As the employer, the umbrella company deducts the necessary PAYE and national insurance contributions from the gross pay and pays you your salary.

Umbrella companies are ideal for short term contracts or if you are new to the world of contracting. Staying with the same umbrella company gives you continuous employment which is important when applying for mortgages. There are no unexpected tax bills as your umbrella company makes all the necessary PAYE and NI deductions for HMRC. To view the full list of benefits, visit our Umbrella Company Benefits page.

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Are all umbrellas the same?

There are lots of umbrella companies out there, all promising different levels of take home pay and different levels of service, so who do you believe and who do you choose? Here are some tips and general advice for how to spot the heroes from the villains.

Are all umbrellas the same?

Get your free umbrella company quote.

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