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  • Writer's pictureUmbrella Search

Umbrella or PAYE? Which one you should choose

Updated: Sep 18, 2023

Every contractor has to make decisions throughout their careers, and one of those critical choices contractors must make is whether they should work through PAYE or umbrella.

The differences between PAYE and umbrella and knowing which is best for you can be confusing and complex, and at Umbrella Search we understand that many contractors want to merely focus on the contract at hand rather than spending time figuring out the best way for them to work. That’s why we're here to help make the decision easy.

In this comprehensive guide, we outline the differences between PAYE agencies and umbrella companies, to help you make the best decision on how you should be contracting.

Umbrella vs PAYE: what’s the difference?

When a contractor decides to use the services of either an umbrella company or PAYE agency, they become an employee of their chosen provider, unlike contractors who decide to set up their own limited company who instead operate as self-employed workers.

This draws us to the main commonality between PAYE and umbrella – the way that contractors are paid and taxed through both.

Both an umbrella company and a PAYE agency will process the contractor’s salary through their own payroll before paying the contractor. This means that the contractor’s salary is subject to pay-as-you-earn deductions, which are tax deductions worked out based on how much the contractor is earning, in line with current tax bands. The correct levels of National Insurance are also deducted.

As we have mentioned, this is the main similarity between both, however there are several differences which are worth considering when making your decision.

Employment continuity

With a PAYE agency, each new contract the contractor takes on becomes a new run of employment. This means that when your current contract ends the contract you hold with the agency does too.

With an umbrella company, on the other hand, contractors are granted continuity of employment, meaning that even though you will work on several contracts with different clients you’ll only have one employer – the umbrella company.

Having continuity of employment generally makes life easier. After all, not only do you not have to worry about renewing a contract with the PAYE agency, it also makes things like being approved for credit, loans and mortgages much easier. It also means you always have one handy tax code and are provided with just one pension pot.

What is an umbrella company?


Every contractor must have certain types of insurance, whether they are self-employed and operate through a limited company, work with a PAYE agency or umbrella company. By law, contractors must be covered with professional indemnity insurance and public liability insurance, and some will need extra cover depending on the contract at hand.

Both umbrella companies and PAYE agencies are legally obliged to cover contractors with these basic types of insurance, meaning you can rest assured you will have the cover you need to perform the contract at hand whichever route you take.

However, some umbrella companies will also provide extra types of cover such as life insurance, health insurance and accident cover for no additional cost, so it's always important to weigh up whether these are important factors to you and take this into account when making your decision.


Although contractors are employed by both umbrella companies and PAYE agencies, they can typically only claim back expenses through an umbrella company.

This means that when contractors incur legitimate business expenses, such as purchasing uniform or equipment for work or travel costs, they are able to offset these expenses against their tax bill.

This greatly benefits umbrella contractors, meaning they will pay less tax overall.

It’s always worth talking to your chosen umbrella company about how they can help you claim back business expenses.

Employment benefits

With both an umbrella company and PAYE agency the contractor will receive statutory employment benefits. This includes sick pay, holiday pay, maternity pay and paternity pay.


There's typically no cost to working through a PAYE agency. This is due to the fact that PAYE contractors don't receive the same level of help and support from the agency that umbrella contractors do.

Contractors working through an umbrella company will pay monthly fees to their provider. Umbrella company fees are very competitive and will come in at around £20 per month or more, depending on the level of services you'd like.

Although this is an additional cost to the contractor, you will receive several benefits in return such as certain types of insurance that you subsequently won’t need to pay out of your own pocket for.

What's more, as contractors have continuous employment with the umbrella company, it is widely believe that they in turn benefit from more support and guidance in the longer run as a result.


The great news is that both umbrella company employees and PAYE workers are deemed to be outside of IR35, meaning no worrying about getting caught out.

Which industry are you contracting in?

  • IT & Tech

  • Finance

  • Medical

  • Other

PAYE vs Umbrella: What’s best for me?

Umbrella or PAYE? Every contractor will ask themselves which will be the better option for them.

Generally speaking, for contractors that work on multiple contracts one after the other, that want the ability to claim back expenses, want additional guidance and benefits and want continuous employment, an umbrella company is the best way to go.

On the other hand, for contractors that only intend to contract for a short time, perhaps before going back into permanent employment, a PAYE agency may be the better option.

If you’ve weighed up the options and landed on umbrella company as the best way forward, Umbrella Search is here to help.

See how Umbrella Search can help you find the perfect umbrella company

At Umbrella Search our experienced team know how to find you the best umbrella company out there. We work closely with contractors to understand their needs and requirements, before undertaking the hard-work to find you the perfect match.


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