Is PAYE better than an umbrella company?

When it comes to your contracting career, it's important to see that it's not a PAYE vs umbrella situation. You can use one or the other, or switch between them if you want, as you move through your contracting career. However, it is an important decision and it’s worth considering carefully. Your choice will have an impact on your day-to-day work as a contractor for a long time.

The guide from Compare Your Pay will provide you with information about what PAYE and umbrella are, so that you can decide which option is right for you.

PAYE vs umbrella: what are the similarities?

Employment

PAYE and umbrella are similar in the sense that the contractor would be working through both of them.

Also, the contractor will be paid in a similar way through both of them.

So how does this work?

The umbrella company will be the employer of the contractor so it will place the contractor on its company payroll, pay them a monthly salary in return, calculate and deduct PAYE tax and National Insurance, provide statutory benefits, give them the required levels of insurance and be at hand to give them day-to-day support.

The second option is that the contractor works for a PAYE agency. The contractor will be employed by the PAYE agency, which will pay the contractor a salary – just as an umbrella company will.

This is their main similarity, ie, the fact that they both pay the contractor a salary and process his salary through their payroll, which means that the contractor pays tax via the pay-as-you-earnsystem, so that they are always kept updated on how much they need to pay HMRC.

IR35

Another similarity with PAYE and umbrella is that, as a result of being employed, contractors will also automatically benefit from being outside IR35.

This is good news for the contractor, and they don’t need to fret about the legislation flying under the radar and the reputational damage this can bring.

While these two options have a lot in common, they also differ in several critical ways that can have a major impact on the contractor.

PAYE vs umbrella: what are the differences?

Continuity of employment

Despite the fact that both umbrella companies and PAYE have the contractor working for them, they do so in different ways.

An umbrella company would employ the contractor and keep them on as an employee even if they’re between contracts.

A PAYE agency will employ a contractor only when they are engaged on a contract, so if you have been working on a contract that comes to an end, then the agency will cease to employ you. If you take on a new contract, then the agency will employ you again but this will usually be a new run of employment.

This affects everything from being able to get a mortgage to taking credit or loans. You’re going to find it easier to get a loan if you have continuity of employment, for example.

Continuity of employment also means one handy tax code and just one pension pot. These are all a bit easier.

Who can claim expenses?

While with PAYE you will still become an employee, with an umbrella company you will, more often than not, be able to reclaim some expenses. This will be managed for you by the umbrella company, and you can read more about umbrella company expenses in our guide.

This is great news, as expenses are tax deductible, reducing your tax liability.

Who sources the work?

An umbrella company, meanwhile, sees the contractor as the entity primarily responsible for securing a contract and accepting the work.

This is normally seen as a positive by contractors, since you have the freedom and flexibility to chase the work you really want – ie contracts that you are happy to work on, with clients that you believe are a good fit for you; and it also leaves you entirely in control of your own career progression, at a pace that works for you.

With a PAYE agency, they will find and hire the contract work, leaving contractors with less choice and autonomy over their career.

Which is the best option for contractors?

The answer to this is different for every contractor, but, if you typically operate on one or more contracts; want to benefit from continuity of employment; want to be in control of your own career; and want to be able to claim expenses (travel, equipment etc) then an umbrella company will likely be the right choice for you.

So if you are planning on doing just one contract, or perhaps you would like the convenience of having an agency find your contract work for you, then a PAYE agency might be best.

That’s why, on balance, the umbrella company benefits are more appealing than those offered by a PAYE agency, which is why it is more commonly used by contractors across the board.

If so, your next step will be to find an umbrella company.

Let Compare Your Pay help

However, we love working closely with contractors to discover exactly what you need from your umbrella company, from same-day payments to childcare tax credit advice, or salary sacrifice.

When we know what you seek in an umbrella company, we start researching the best match for you amongst various umbrella companies.

This means that, when you go to choose your umbrella company, you can be confident that you’re making a good choice.

Want to find out more about how we can help you and take those first steps to sorting out an umbrella company that you can trust and one that can help propel your career? Then get in touch with the team at Compare Your Pay today.