Umbrella or PAYE: what is the difference?

‘Umbrella or PAYE: what is the difference?’ It’s a fair question, a good question even, but first we ought to ask a more fundamental one, writes Lucy Smith, managing director of Clarity Umbrella. And that is this:

What is PAYE?

Pay As You Earn (PAYE) is HMRC’S system to collect Income Tax and National Insurance from employment.

Under umbrella or agency, you are deemed an “employee” predominantly for tax purposes and as such, all taxes and National Insurance will be deducted at source by the company you are employed through (the umbrella or agency).

When it comes to contractors, those who have inside IR35 contracts are deemed to look like “employees” and so need to be paid via PAYE.

Ordinarily, a permanent employee is usually given a taxable salary (i.e. the figure given if you were offered a full-time annual salary), and this is then subject to PAYE and Employee NI. However this is where umbrella and agency PAYE differ.

Typically two option on inside IR35 contracts

When contractors take on an assignment via a recruitment agency that falls inside IR35, they may give you the opportunity to be paid in one of two different ways;

  • Via an Umbrella Company; or
  • Via Recruitment Agency PAYE.

So how do you know which route to go down? Well, this depends on a number of variables, but let’s start by understanding the similarity and then the difference, so you can make an informed decision as to whether it’s agency or brolly for your next assignment.

Under both umbrella and PAYE, you are employed and as a result, will pay full PAYE taxes. However, an agency is likely to offer you two different rates, or at least an agency should do!

Assignment rate, employment costs, and taxable salary

For umbrella, the “assignment rate” that is given to you is technically the invoice rate that is issued to the agency, from which employment costs have to be met. By ‘employment costs,’ we mean Employer National Insurance (NI), Apprenticeship Levy, and the umbrella company’s margin. These are deducted from the monies received before arriving at the taxable salary (i.e. the amount you would see if you were offered a permanent role). The uplift from the standard PAYE rate is deemed to cover these additional costs you would not usually see.

Agency PAYE, explained

You should therefore expect to see a lower rate offered if you opt to go down the Recruitment Agency PAYE route, as the agency have already taken the employment costs into consideration, before arriving at the offered rate.

Under agency PAYE, you are taken onto the agency payroll, and they would ensure deductions are taken for PAYE and NI contributions before issuing you with a payslip. The rate you are given would be deemed your taxable salary and would be similar to what you would see if you were in standard employment.

What umbrella take-home pay looks like

So, let’s take a look at what this actually means, starting with the umbrella option. On a day rate of £500.00 per day with an umbrella, the weekly figure (assuming as standard tax code) would look as follows:

Invoice / Assignment Rate: £2,500.00 – Umbrella PAYE Figures (£500 per day for 5 days a week)


Employers NI: £277.58

Apprenticeship Levy: £10.93

Umbrella Margin: £25.00

TAXABLE SALARY: £2,186.49 (£437.29 per day) – Agency PAYE Figures

PAYE: £632.79

Employees NI: £111.39

NET PAY: £1,442.31

In simple terms, an umbrella rate of £500 per day is the equivalent of £437 per day PAYE, so if the agency is offering anything less than that PAYE, you would be better off working umbrella.

Holiday day and pensions via umbrella and agency

The other things to consider when faced with Umbrella or PAYE, are things like holiday pay and pensions. Most agencies are likely to allocate holiday pay from the rate, and may hold this back -- whereas umbrellas usually offer the option for retained or advanced holiday pay (rolled-up holiday pay), whichever suits you best.

With pensions, a lot of the agencies will only cover ‘auto enrolment’ pension, with no flexibility. The umbrella option is likely to be able to give you the option to opt in without deferment, the ability to make additional contributions, with many operating a ‘salary sacrifice’ scheme to allow both tax and National Insurance savings at source through the payroll. Some even allow the option to continue to make contributions to existing personal pensions (such as SIPPs), rather than having yet another scheme.

Feeling charitable?

Finally, consider that some umbrella companies also allow Give As You Earn or Charitable Giving options via salary sacrifice. That’s something that agencies would not generally have the ability to facilitate.

So be sure when you are offered a rate to look at what the rate covers, and if in doubt ask the umbrella company to confirm what the equivalent PAYE would be on the rate you have been offered.

Wednesday 17th May 2023
Profile picture for user Lucy Smith

Written by Lucy Smith

Lucy has over 9 years extensive experience in the umbrella market, much of this time spent managing one of the most reputable umbrella companies in the market and now, Clarity Umbrella.
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