If you’ve decided that running your own business as a limited company or sole trader really isn’t for you, you might consider working through an umbrella company. Alternatively, there are a number of recruitment agencies who could process your income directly as PAYE through their own payroll.
The two options are very similar as in each case you become an employee of the organisation, which then takes care of all necessary payroll and administrative tasks. Both options will see you taxed under the pay as you earn (PAYE) system, meaning you never have to worry about completing any tax returns.
Your agency may offer you two hourly rates of pay. These rates exist as the recruitment agency uplifts the umbrella rate to pass their employment cost savings on to the contractor.
Significantly, both options involve far less paperwork and your personal responsibilities are much lower than if you chose to work as a sole trader or limited company. That said, there are some differences to be aware of, namely the ability to claim tax relief on expense when working through an Umbrella company subject to complying with a supervision, direction and control (SDC) test.
Umbrella PAYE vs Agency PAYE
This is where you become an employee of an Umbrella Company, allowing you to work on a series of assignments without the responsibilities of running your own company.
For more details about Brookson's Umbrella Solution, click here.
Working with a recruitment agency means that you will be employed by them. Your salary will be processed by their own payroll as PAYE.
Neither way of working has the same expenses benefits you would enjoy when running your own limited company. That said, as an employee of an umbrella company you are allowed to claim back certain expenses such as travel and subsistence providing you pass a supervision, direction or control (SDC) test which came into effect in April 2016. If you choose to get paid directly by an agency, this option is not available to you, meaning that you probably face lower take-home pay even on the same hourly rate. If you have to travel a lot for work, perhaps because your role requires you to spend lots of time on clients’ sites, you should consider working through an Umbrella Company as you may be entitled to tax relief on the associated expenses which will increase your take home pay.
When you are offered a contract role through a recruitment agency, you may be offered two separate pay rates. One rate to work as an employee of the agency and another to work as an umbrella employee. The two rates exist as the recruitment agency uplifts the umbrella rate to pass their employment cost savings on to the contractor.
Both options involve far less work than running a limited company, but umbrella contractors have slightly more to do than agency staff. In both cases a timesheet has to be submitted including details of the hours you work, but those employed by umbrella companies must also submit expenses forms. Still, since this paperwork maximises your take home pay, you may well decide it’s worth investing the time.
Long or short term
One of the best things about self-employment is the freedom to pick your assignments and choose when and where you want to work. If you intend to take one contract before retaining permanent employment, then agency payroll is likely to be your best option as you may not be able to claim tax relief on travel and subsistence expenses.
If, like some contractors, you tend to work on several projects, you might find that umbrella companies are a good option. If you decide that self-employment in the long run is for you, then it's often best to consider running your own business to take advantage of further tax relief to increase your take home pay.
Getting to grips
Making the decision to work for yourself will have a considerable impact on your life, and for many who have only just made the switch, umbrella companies and agencies are an excellent option while they get to grips with self-employment. Equally, both have been successfully used by a number of professionals for long, fruitful careers. Still, neither has the benefits that can be offered by working through a limited company.
FREE consultation and take home pay illustration
If you would like to understand more about your working options and how they affect you financially and the levels of day-to-day responsibility then you will find our free, no obligation consultation and take home pay illustration really helpful.
Simply tell us the sector you work in, your annual income or agency rate, hours per week and any business expenses you incur - and we'll do the rest!