Here’s a scenario for you. You’ve done the difficult part and secured your next assignment through a recruiter, who has asked if you’d rather operate through an umbrella company or become an agency PAYE worker.
Like many people at this stage, you might be not completely clear on the difference between the two. But fear not, in this article we’ll look at agency PAYE vs umbrella working to help you make a well informed decision.
What is an agency PAYE worker?
Here, you become an employee of the employment or recruitment agency that has placed you - hence the term agency worker. You’ll join the intermediary’s payroll for the duration of the contract and be paid minus PAYE tax deductions, just like an employee.
All agency PAYE workers are entitled to workers’ rights, but you won’t necessarily receive them all from day one. The national minimum wage and the statutory minimum level of paid holiday are granted to you immediately though.
After 12 weeks you qualify for the exact same rights as someone employed directly. In other words, you receive what’s known as ‘equal treatment’. Whether it’s equal pay to direct employees in the same role, automatic pension enrollment or paid annual leave, agency workers will get many of the same benefits after 3 months in the same contract.
Understood, but what is PAYE?
You’ve no doubt heard the term ‘PAYE’, which is an acronym for Pay As You Earn. It alludes to the Income Tax that will be deducted from your salary before you’re paid. PAYE tax is usually subtracted at source by your employer who will then pay it to HMRC, along with National Insurance contributions (NICs).
The alternative way to pay Income Tax is via the self-assessment, which is how freelancers and contractors who do not work on the payroll of agencies, clients or umbrella companies submit their tax returns.
What is umbrella working?
While umbrella working has a number of similarities to agency working, there are also some key differences, which we’ll run through now.
Like agency workers, umbrella workers are employees of the umbrella company. As an umbrella worker you will also be subject to PAYE tax, which will be deducted by the umbrella company who will then pay you the remainder.
However, where agency workers must wait for 12 weeks to receive equal treatment, umbrella workers can get the full range of employment rights immediately - whether that’s sick, maternity or paternity pay or paid holiday.
What’s more, it’s widely acknowledged that umbrella workers have more freedom and flexibility than agency workers. This is because an agency worker is only engaged for the duration of the contract held by the recruitment company. In contrast, umbrella employees can work on multiple contracts simultaneously and also dip in and out of this way of working as and when they want or need to.
Agency PAYE vs umbrella - a comparison
|Fast and simple to get started||Yes||Yes|
|Opportunity to claim business expenses (depending on SDC)||No||Yes|
|Receive statutory rights from day one||No||Yes|
|Work on multiple projects||No||Yes|
|Are not impacted by IR35||Yes||Yes|
So which is best? Agency PAYE or umbrella company?
Ultimately, the choice is a personal one. However, one way to decide is by thinking about what matters most to you.
For example, if you want to work on multiple projects, would like the benefits and security of continuous employment and will incur travel and subsistence expenses as a result of working this way, umbrella working will likely tick the right boxes.
On the other hand, if you plan to work on a temporary contract just this once before returning to permanent employment and want your work sourced and paid by the same organisation, then agency PAYE might be an avenue to explore.
With over 20 years of experience in providing leading umbrella services for over 100,000 individuals, Parasol is an award-winning umbrella company. To learn more about working this way and to decide if it’s right for you, please contact our friendly team today.