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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?
PayStream's My Max umbrella service
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|
|One workplace pension pot across all of your contracts if working on multiple agencies|
|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|
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:
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:
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.
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?