Choosing Between an Umbrella Company and Agency PAYE

13.05.22

Being an independent contractor instead of a regular employee is a great way to make the most of your skills, but a great many extra responsibilities come with being a sole trader or having your own limited company. Is it possible to get the best of both worlds? Taxation will be one of the bugbears that leads you to investigate joining an umbrella company or an agency. Which is better for you from a tax perspective? We look at the pros and cons of working through an umbrella company vs PAYE levied through agencies. 

What is an Umbrella Company?

An umbrella company acts as your de facto employer whether you are working on a single contract, are servicing multiple contracts, or are between contracts. You still have all the freedom of an independent contractor, but you get all the benefits of having continuous employment. In addition, the umbrella company handles invoicing and payments, while ensuring that your tax and insurance payments are up-to-date. 

How do Agencies Work?

When you work through an agency, employment only lasts as long as the contracts you are busy on. While you are busy with your contract, you’re seen as an employee. Once the contract ends, you are no longer employed. Meanwhile, you are taxed through agency PAYE. Apart from this lack of continuity, the rates paid to agency employees tend to be lower than those paid to contractors working under an umbrella company. But is an umbrella company really better than PAYE? Let’s take a more in-depth look at the differences between the two.

Umbrella Company or Agency PAYE?

We’ve already ascertained that continuity of employment is better when working under an umbrella company, but that’s just one factor. Let’s explore the other implications that you need to keep in mind when considering the choice between agency PAYE or an umbrella company that deducts PAYE

It may be tempting to choose an agency since it charges the client for its services instead of charging you, but you’ll probably get a lower hourly rate when working through an agency. Agencies charge the client commission. This could be as much as 30 percent of your earnings. True, you don’t do the actual paying, but if your client is willing to pay anything from 15 to 30 percent more per hour, it seems a little unfair that you don’t even see the money. 

An ethical umbrella company doesn’t charge your clients anything, and it only charges you its margin when there is income from which it can be deducted. As for tax, there is only one correct way for it to be calculated. Low tax means incorrect tax and a good chance that you’ll be called upon to pay the difference at short notice. The government is very alert to tax avoidance, and you don’t want to be involved in its consequences.

But what makes umbrella companies better than PAYE through an agency? Under an agency, you will pay more tax than you do under an umbrella – we’ll look at the reason for this shortly.  And because you don’t have continuity of employment, applying for loans or mortgages becomes very difficult. 

We also need to consider employment benefits. As an umbrella company employee, you have all the rights of a regular employee whether or not you currently have work. Under agencies you are entitled to an employee’s statutory rights, but with the term of your employment being curtailed to your contract’s duration, these will be limited. In short, if you don’t currently have a contract, you have none of the benefits of being an employee. 

As an agency employee, the agency receives payment for your services from the client. As an umbrella company employee, you are the client, and you pay for its support services. It’s a subtle difference, but it indicates where the priorities lie. The agency cares for its clients (the companies for whom they find contractors) while the umbrella company prioritises you. 

The Difference Between Umbrella and Agency PAYE

It would be easy to conclude that PAYE remains the same whether you choose an agency or an umbrella, but that isn’t actually so. From a practical perspective, the primary difference is that you can deduct allowable expenses from your turnover when working through an umbrella company. Needless to say, that can make a big difference to your tax bill. 

So, too, does the fact that all your payments pass through the single employer: your umbrella company.  Although the 20 percent tax for a BR code allocated to someone with a second job would apply to agency workers who undertake additional contracts while working on an agency contract could be refundable, your umbrella company ensures that you don’t overpay in the first place. 

Another difference worth keeping in mind is the continuity of employment we have already discussed as well as the freedom to work on several contracts simultaneously without getting your taxes in a muddle. Is an umbrella company better than agency PAYE? We’re confident that it is! So much so, that many agencies are preferring contractors who work through umbrella companies – so this may not be a simple choice between agencies and umbrella companies after all!

Ready to get Under the Umbrella? Why Choose Evolve CS?

If your primary question was whether it’s better to work under agency PAYE or an umbrella company, you should have the answers you need after reading this article. While the differences between the two are subtle, the financial implications could be significant. But not all umbrella companies are created equal, and the degree to which you benefit from working with one depends very much on the umbrella company you choose. 

The first, and most important thing to consider when choosing an umbrella company is its reputation. You need an umbrella company that has been in the business for years and that has a spotless track-record for tax compliance. Not sure where to start? Evolve CS has been serving its contractors since 2018 and has garnered a wealth of positive reviews. But don’t let that be the only reason why you choose us! Get in touch today and discover how contracting with an umbrella company helps you to take your contracting business to the next level. 

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