PAYE vs Umbrella

PAYE vs Umbrella Company: What’s the Difference?

During the Covid crises, or even after the post-pandemic, where many businesses are struggling hard to sustain and revive. Some sectors are experiencing a boom and have robust demand for short-term workers. Luckily, it is the best time for contractors who mostly perform short term works. Whether you are a contractor or want to set your foot as a one, you might be wondering what is the most effective route to get payments: PAYE or Umbrella Company. So in this post, we’ll discuss the difference between PAYE vs Umbrella Company and the pros and cons of working for both.

Let’s delve deep into it!

 

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What is PAYE?

Just like regular employees, PAYE  (Pay As You Earn) is the method to pay Income Tax and NICs to HMRC before you receive your salary. It is the most common and practised method to pay income tax in the UK. If you (as a contractor) choose this route, the PAYE agency is responsible to find and get your work and pay you through the PAYE system. You need to pay tax similar to current PAYE rates based on your tax bands. Here is the current tax (2021-22) rates as per the tax bands.

England, Wales and Northern Ireland

  • Personal allowance (0%): up to £12,570 per year
  • Basic rate (20%): from £12,571 to £50,270 per year
  • Higher rate (40%): from £50,271 to £150,000 per year
  • Additional rate (45%): over £150,000 per year

England, Wales And Northern Ireland

Scotland

  • Tax free Personal allowance (0%): up to £12,570 per year
  • Starter rate (19%): £12,571 – £14,667 per year
  • Basic rate (20%): £14,668 – £25,296 per year
  • Intermediate rate (21%): £25,297 – £43,662 per year
  • Higher rate (41%): £43,663 – £150,000 per year
  • Top rate (46%): over £150,000

Scotland

 

Learn more about PAYE and Payroll registration.

 

What is Umbrella Company?

Technically, an Umbrella Company works the same as PAYE. It acts as an employer of the contractors and put the contractors on their payroll as an employee. It processes their payments, deducts tax and NICs on their behalf through the PAYE system. Now you might be confused: what is the difference between PAYE and Umbrella?

 

PAYE vs Umbrella Company: The Difference

The Umbrella company allows the contractor freedom to choose the work contracts and the timings they want to work on. Bear in mind that still, the Umbrella company uses the PAYE system to pay taxes of the contractors, but allows greater flexibility.

On the flip side, the PAYE agency employs contractors and finds contract work for them. In addition, the PAYE company also determines which contracts you should take and when you need to work on them. So if you have multiple contracts and work on different projects at the same time, then a PAYE agency may not be suitable for you. However, with fewer benefits, it is an easy option for some contractors, who’re just starting out.

Another difference between the both is the continuity of the employment. Only Umbrella company offers you one handy tax code, whereas PAYE agency does not. It implies that you might get in trouble if you work for a PAYE company when you apply for a loan or mortgage.

 

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Whether you (as contractor) work under PAYE or Umbrella company, you are considered an employee and are eligible to claim statutory benefits like sick, holiday, maternity/paternity pay leave, etc.

 

PAYE vs Umbrella – Which Option is Best?

Now after getting a basic overview of both, you can choose the option as per your circumstances. Bear in mind that you will be paying the same amount of tax and NICs no matter what option you choose. Contractors should consider the freedom and flexibility when it comes to PAYE vs Umbrella:

PAYE Agency: It is an easy and secure option as all the contracts are provided by the agency and you get salary via PAYE. All the benefits of being an employee will be granted to you like sick pay, etc.

Umbrella Company: It is the best option, as it allows more freedom and you get the chance to do the project that you want to, without having the stress to operate your own limited company, like management and administrative tasks.

 

Quick Sum Up

After giving this post a read, now you have a better understanding of the difference between PAYE vs Umbrella company. Both work the same, when it comes to payment processing and deducting taxes, as both use the PAYE tax system. However, the main difference between the both is Umbrella company offers more flexibility and freedom to contractors than PAYE agency.

 

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Disclaimer: This blog is intended to provide general information on PAYE vs Umbrella Company.

 

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