What is Umbrella Payroll?

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Suppose you’re looking to work with the freedom and flexibility of self-employment but with the simplicity of employment. In that case, a couple of options are available to you – working via an umbrella company or an agency.

Both will see you paid under the PAYE system, with the appropriate taxes paid to HMRC on your behalf. As such, it’s essential to understand what they are so that you can make an informed decision. This article explains the difference between agency and umbrella PAYE and outlines some of the benefits.

How an umbrella company works

An umbrella company is an employment company, sitting between the worker and the end client. So, umbrellas pay workers and provide all statutory entitlements, like holiday pay and sick pay, while giving flexible workers the freedom to choose which contracts they would like to work on. When operating via an umbrella company, the IR35 legislation isn’t a consideration because you become an employee of the umbrella. IR35 only applies to individuals working via their own limited company.

What's the difference between PAYE and umbrella?

Pay As You Earn (PAYE) is the system HMRC uses to recover taxes from payrolled workers. In contrast, the self-employed (and some high-earning payrolled workers) use Self Assessment. Independent workers can work through an umbrella company or a PAYE agency. In both instances, payroll is run and tax deductions are made on the workers’ behalf. However, there are some minor differences. An agency must be engaged repeatedly with each new contract, whereas an umbrella company generally offers overarching employment, meaning you’re covered in between contracts.

As well as this, an umbrella tends to provide a higher rate of pay and statutory benefits like holiday entitlement, parental leave and sick pay. Which is better – agency or umbrella company – depends on your personal circumstances and preference.

Your rights as an umbrella employee

As mentioned above, umbrella employees are provided with the key statutory benefits that all permanent employees are entitled to. These benefits offer additional financial security to the self-employed, who would otherwise have to account for holidays and parental leave in their work schedule and budgeting.

Annual leave and holiday pay

All full-time workers are entitled to 5.6 weeks of annual leave each year (including bank holidays), or the pro rata equivalent for part-time workers. Umbrella companies will deduct your pay from the assignment rate of the contract you’re currently working on and can pay it back to you when you take annual leave or every time you’re paid.

The right to a written contract

You have the right to a written contract detailing the terms of your employment and how your rate of pay will be calculated. Find out more from ACAS.

The right to at least minimum pay

Like all workers across the UK, you are entitled to at least minimum pay in line with National Minimum Wage. This changes depending on your age; you can see the current rates here.

Sick leave and pay

Umbrella workers are entitled to Statutory Sick Pay (SSP), paid at £99.35 a week for up to 28 weeks of the year. We’ve covered SSP for umbrella company workers here.

Parental leave

Provided you’ve met the qualifying criteria, you may also be entitled to take maternity or paternity leave as an umbrella employee and may be entitled to statutory pay. This includes working for your employer or umbrella company for 26 weeks and providing proof that you are (or your partner is) pregnant.

How is take-home pay calculated?

Your take-home pay – also referred to as net pay – is what you’re left with, after tax (and any other deductions). Whether you enlist an agency or umbrella, PAYE will be run to make the Income Tax and National Insurance deductions.

These are calculated based on your tax code and how much you earn. The company deducts these from your gross pay on HMRC’s behalf, alongside pension contributions, student loan repayments, and salary sacrifice payments.

An umbrella company will also deduct its fee from your gross pay. Everything that remains after these deductions is yours to keep.

Umbrella PAYE FAQs

How does an umbrella company work?

An umbrella company employs independent workers, providing an overarching contract of employment and the statutory benefits it offers, as well as managing administrative duties and payroll.

How does agency PAYE work?

Similar to an umbrella company, in that tax deductions and payroll is taken care of. However, there’s no overarching employment contract, and you’ll engage an agency PAYE provider on a contract-by-contract basis.

What’s the difference between an umbrella company and agency PAYE?

Umbrella companies usually offer slightly higher rates of pay and one continuous employment contract, whereas agency PAYE companies offer one-off payroll and PAYE services.

What is an umbrella PAYE rate?

The pay rate you’ll receive as an umbrella employee is the assignment rate for the contract, minus the umbrella’s margin and your tax deductions.

What extra benefits are provided by an umbrella company?

An employment contract means you’ll be entitled to statutory pay for things like holidays, sick leave and parental leave.

So, in short, an umbrella company acts as an employer for flexible workers. When you work through an umbrella, pay is calculated and taxes are deducted on your behalf. Agency PAYE companies offer a similar solution but with some slight differences.

At Parasol, we offer trusted umbrella PAYE solutions.