If you have decided that being a limited company contractor or sole trader is not the best path for you as a contractor, you can work either through an umbrella company or PAYE agency.
If you are currently operating through an umbrella company and are considering switching to PAYE, you will need to know what the move will entail. After all, there are some key differences between the two which will impact the contractor's day-to-day life.
To help, Umbrella Search has put together this guide on everything you need to know to decide if switching from umbrella to PAYE is the right move for you.
Working through an umbrella company
Once the contractor has chosen which umbrella company they will work through, they are given continuous employment by the umbrella company, which becomes their employer. This means that they are employed even when they are between contracts.
Although the contractor is granted continuous employment, which is good for things like mortgage applications and loan approvals, they are free to work on a number of different contracts whenever they like, and with whichever clients they choose. This means a high degree of freedom similar to being self-employed, but with more security such as a salary and statutory benefits.
Working through a PAYE agency
Making the switch from umbrella to PAYE agency will mean that you will lose continuity of employment. PAYE contractors are only employed by the agency for the duration of the contract they are working on. That means once your current contract comes to an end, you will lose your employee status. As we have mentioned, this is not ideal for those looking to apply for a mortgage or things such as loans or credit.
Getting paid through an umbrella company
In terms of getting paid through an umbrella company, they will pay the contractor a direct salary. The end-client will pay the contractor's fee to the umbrella company who then processes the contractor's salary through their payroll.
This allows for the correct amounts of National Insurance and tax to be taken off the contractor's pay before it is sent to them.
The contractor will receive a payslip outlining all the deductions and how much they have been paid.
Getting paid through PAYE
If you make the switch from umbrella to PAYE, you will be paid in exactly the same way. The PAYE agency will process the contractor's pay through their payroll in line with pay-as-you-earn tax bands, paying the contractor the correct amount they are owed once tax has been deducted.
Employee benefits through an umbrella company
As an employee working through an umbrella company the contractor is entitled to a range of statutory benefits which include holiday leave, sick pay and maternity/paternity leave. To read more about contractor holiday pay and other rights, check out our useful guide.
However, umbrella companies often also go the extra mile and offer contractors additional benefits such as health insurance and pension schemes.
Employee benefits through PAYE
Contractors that make the move from umbrella to PAYE will still be entitled to such statutory benefits when they are working on projects, however once their contract has ended they will no longer be eligible for statutory benefits as their employment term is no longer running.
What's more, PAYE agencies don't typically offer additional benefits such as private medical care and pension schemes.
IR35 with an umbrella company
Every contractor wants to avoid getting caught out by infamous IR35 legislation. IR35 was introduced to stop self-employed workers including contractors from enjoying the tax benefits of being self-employed but actually working more like employees. This was to ensure these individuals were paying the correct levels of tax.
Since IR35 was introduced, thousands of self-employed contractors have been forced to pay higher taxes in line with employees but not receive any of the benefits that employees do. What's more, many have faced lengthy and expensive IR35 investigations. For this reason, most contractors wish to avoid IR35.
The great news is that umbrella company contractors don't have to worry about IR35 due to the fact that they are employees, meaning IR35 is irrelevant. That gives them one less thing to worry about.
IR35 with a PAYE agency
If you're considering switching to a PAYE agency, this should mean that you remain outside of IR35 due to the fact you will be employed when working on the contract.
Should I make the switch from umbrella to PAYE?
If you are considering making the move from umbrella to PAYE there are a number of factors you will need to consider. For example, moving to PAYE will mean that you lose continuity of employment and additional benefits such as health insurance that you receive through an umbrella company.
Generally speaking, an umbrella company is therefore the better option if you plan to work on a number of contracts simultaneously, yet you may want to make the switch to PAYE if you only plan on working on a single contract for a short amount of time before going back into employment.
Let Umbrella Search help with the next steps
After reading our guide on switching from umbrella to PAYE, if you have decided that umbrella company is the best option for you, we are here to help you find the best umbrella company out there.
Whether you have previous contracting experience or are brand new to it, our friendly and professional team will do their best to get to know you and your circumstances in order to provide recommendations that best suit you.
To see how we can help you, and to let us take on the hard work for you, just get in touch with the Umbrella Search team today and take the first steps to finding the perfect umbrella company for you.
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