When accepting a temporary assignment through a recruiting agency, contractors and freelancers in the UK are frequently given two payroll options: umbrella company vs agency PAYE. Continue reading to learn the difference between an umbrella company and agency PAYE.
Umbrella company vs agency PAYE: what is the difference?
The assignment rate you are offered
Both agency PAYE and an umbrella company will pay you through Pay As You Earn (PAYE). HMRC uses the PAYE system to collect income tax and national insurance from employees pay. Before paying you your net wage, your employer (e.g. your umbrella company or recruitment agency) will deduct the necessary taxes and send the payment to HMRC each time you get paid.
Selecting an umbrella company may result in an uplifted rate, which is one of the differences between agency PAYE and umbrella companies. This is because employment costs (such as Employer Pension Contributions if applicable, Apprenticeship Levy, Holiday Pay, and Employers’ National Insurance) must be covered by the umbrella company. As a result, recruitment agencies frequently give contractors who use an umbrella company to process their payroll an uplifted rate to cover these costs.
The amount it costs to use the service
Another difference between an umbrella company vs agency PAYE is that an umbrella company will charge a margin for processing your payroll, while the recruitment agency does not. The weekly margin for an umbrella company will be between £15 and £30. You only pay the margin for the weeks that you work.
Your employment
Another important difference between an umbrella company vs agency PAYE is that you will have continuity of employment when you work via an umbrella company. This means that if you accept different assignments with different end clients you will still be seen to have one employer – the umbrella company. Continuity of employment is particularly important if you have several contracts at the same time. It is also useful when applying for a loan or mortgage. However, with agency PAYE every new contract with an end hirer constitutes a different run of employment with the recruitment agency.
Extra services and benefits for contractors
If you use an umbrella company or agency PAYE, you will be eligible for statutory employee benefits such as sick, maternity, or paternity pay. However, many umbrella companies also offer additional employee perks or reward schemes to contractors who use their services. If you prefer more than just a payroll service, you are better suited to using an umbrella company.
If you are unsure which payroll option you may be better suited to, our useful guide, “Umbrella Company v Agency PAYE,” can provide more information.
Why do recruitment agencies refer contractors to umbrella companies?
Partnering with umbrella companies and referring their workers to trusted providers allows recruitment agencies to focus on their primary business activity—placing candidates in temporary roles. Referring workers to umbrella companies for their payroll reduces the administration, compliance, resources, and time required to run payroll.
To manage their risk and ensure their workers only use compliant providers, many recruitment agencies will provide contractors with a Preferred Supplier List (PSL) from which to pick an umbrella company. To determine which umbrella companies will be listed on the PSL, many recruitment agencies will only include umbrella companies that are accredited by Professional Passport or the FCSA. To achieve FCSA or Professional Passport accreditation, umbrella companies must pass an audit and assessment to prove they are compliant.
Top 10 umbrella companies
If you are looking for an umbrella company, why not start your search by looking at our top 10 umbrella companies? Every umbrella company on our top 10 umbrella companies is either FCSA or Professional Passport accredited to ensure you start your search in the right place. You can also request a callback to learn more about the umbrella service or get a free tailored take-home pay calculation.
