Contractors who source temporary assignments through recruitment agencies and are inside IR35 are given two options for their payroll – agency PAYE or registering with an umbrella company. This article explores what agency PAYE is and how it is different from registering with an umbrella company and becoming an employee of an umbrella company.
Agency PAYE
When a contractor uses agency PAYE, they are paid via the agency’s payroll while being employed by their recruitment agency. The agency will process and pay the necessary tax deductions to HMRC. Generally speaking, using agency PAYE has no fees for using their service. But, the rate you get can be a little less than if you worked for an umbrella company.
Differences between Agency PAYE and Umbrella Companies
If you opt for agency PAYE, you will only be employed by the agency for as long as the end client’s contract, as opposed to the continuous employment between contracts that umbrella companies offer. Continuity of employment is great as it offers a full employment and payslip history which can be used when applying for loans or mortgages. Agency PAYE might not be the best choice if you work with different agencies, change assignments regularly, or work multiple assignments at once. As previously stated, you do not receive continuity of employment when you work through agency PSYE. Every assignment with a different agency or end client is treated as a separate contract with a different employer for taxation purposes.
Another big difference is the rights and benefits you enjoy working through an umbrella company as opposed to agency PAYE. With umbrella, you will be entitled to all statutory employment rights – such as Sick Pay and Maternity/Paternity Pay. The umbrella company will also most likely include insurance as part of their service. For example, Professional Indemnity, Employers Liability and Public Liability insurance at no extra cost to you.
However, with agency PAYE, you are entitled to worker’s rights, but you won’t necessarily receive them on day one. You are immediately granted the national minimum wage and statutory level of paid holiday. But don’t worry, after 12 weeks you qualify for the exact same rights as someone employed directly. Whether it’s equal pay to direct employees, pension enrolment or paid annual leave.
Finally, a lot of recruitment agencies who offer agency PAYE will only allow you to make pension contributions into an autoenrollment workplace pension scheme. Umbrella companies on the other hand may offer the option of salary sacrifice. Salary sacrifice is a tax-efficient way of saving for your retirement and growing your pension pot quickly.
Take a look at our useful guide: “Umbrella Company v Agency PAYE” to discover which is the better option for you.
Top 10 Umbrella Companies
With over 500 umbrella companies to choose from in the UK, you must ensure you pick a compliant one for your payroll. Every umbrella company on our top 10 umbrella companies is either FCSA or Professional Passport accredited to help you start your search.
