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How to choose between PAYE vs umbrella

Deciding between PAYE vs umbrella is a decision that should take careful consideration. After all, this will impact your day-to-day life as a contractor, so it’s important to know all the facts before choosing either PAYE or umbrella. 

In this guide, Umbrella Search outlines everything you need to know about PAYE and umbrella, so you can make the right decision for you. 

PAYE vs umbrella: what are the similarities?


PAYE and umbrella are similar in that they are both ways through which a contractor can operate. As well as this, the contractor will be paid in a similar way through both.

So how does this work?

An umbrella company will employ the contractor. This means that they will put the contractor onto their company payroll, pay them a monthly salary, process and deduct their tax and National Insurance, cover them with statutory benefits, ensure they have correct levels of insurance and be on hand to offer day to day support to the contractor.

A PAYE agency is another way the contractor can choose to work. They will also be employed by the PAYE agency, which will pay them a salary in the same way that an umbrella company will.

This is the main similarity between both, as they both pay the contractor a salary and process their salary through their payroll, meaning the contractor pays tax through the pay-as-you-earn system, ensuring they are always up to date with how much they owe to HMRC.


Another similarity between PAYE and umbrella is that through both, contractors will be automatically exempt from IR35, owing to the fact that they are employed.

This is great news for contractors, meaning they don’t have to worry about getting caught out by the legislation and the detrimental implications this can have on them.

Although the two options share this in common, they also have many key differences which can have a significant impact on the contractor.

PAYE vs umbrella: what are the differences?

Continuity of employment

Although both PAYE and umbrella companies employ the contractor, the way they do this differs.

An umbrella company will employ the contractor and keep them on as an employee even if they are between contracts. 

A PAYE agency, on the other hand, will only employ the contractor when they are working on a contract. This means that if you have been working on a contract that comes to an end, you will stop being employed by the agency. When you take on a new contract, the agency will employ you again, but this will count as a new run of employment. 

This has implications on things like being accepted for a mortgage and taking credit or loans. For example, when you have continuity of employment, this is generally looked upon more favourably, making getting a loan much easier.

Continuity of employment also means that you receive one handy tax code and just one pension pot, making things that little bit easier.

What is an umbrella company?

Who can claim expenses?

Although with both PAYE and umbrella you will become an employee, another difference is that through an umbrella company you will usually be allowed to claim back certain business expenses. The umbrella company will guide you with this 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?

With an umbrella company, it is the contractor that is responsible for finding and securing their own contract work.

This is usually considered a benefit by contractors, as it gives you the freedom and flexibility to go after the work you really want. That means securing contracts you are happy to work on, with clients that you consider a good fit for you. It also leaves you fully in charge of your own career progression, meaning you can progress at a speed that is right for you. 

With a PAYE agency, however, they will find and choose the contract work, leaving contractors with less agency and choice over their careers. 

Which is the best option for contractors?

The answer will be different for every contractor, however, if you tend to work on one or more contracts, want to reap the benefits of continuity of employment, want to be in control of your own career,  and want the ability to claim expenses for things such as travel and equipment, then an umbrella company will most likely be the best option for you. 

If, on the other hand, you only plan on taking on one contract, or perhaps you want the ease of having your contract work secured for you, a PAYE agency may be best.

We would say, on the whole, that the benefits offered by an umbrella company generally outweigh those offered by a PAYE agency, making it a highly popular choice for contractors across sectors.

If this is the case for you, the next step will be to find an umbrella company to work with. 

Let Umbrella Search help

At Umbrella Search, we love nothing more than working closely with contractors to find out exactly what you're looking for from an umbrella company, whether that's same-day payments, help with childcare tax credits, or advice on salary sacrifice.

Once we understand what you want to get out of an umbrella company, our team will start their thorough research in order to find a list of umbrella companies that are the right fit.

This means that you can make a well-informed decision when choosing an umbrella company, and can move forward with confidence.

If you’d like to find out more about how we can help you, and to take the first steps to finding an umbrella company you can trust to help excel your career, just get in touch with the Umbrella Search team today.

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