Understanding PAYE vs Umbrella

According to a recent survey conducted by a leading employment consultancy, approximately 65% of temporary workers shared they were unsure of the differences between PAYE and Umbrella. We’re here to help make it easier to choose the right payroll solution by breaking down both the differences and the similarities.

What is PAYE?

PAYE stands for "Pay as you earn." It is the system used by employers in the UK to deduct income tax and National Insurance contributions from employees' salaries or wages, paying their earnings. In this arrangement, the employer of record is responsible for deducting the appropriate taxes and forwarding them to HM Revenue and Customs (HMRC).

Under PAYE, employees receive a payslip detailing their earnings, deductions, and net pay. It's the most common method of paying employees in the UK and is often used by permanent, part-time, and temporary workers.

" While both PAYE and Umbrella arrangements serve the purpose of different ways to get paid, there are differences between the two. PAYE involves direct employment by the employer, while Umbrella company, you become an employee of the umbrella company."

What is an Umbrella company?

An umbrella company functions by making you an employee. Under this setup, the agency pays the umbrella company, which then handles deductions for PAYE and NI contributions before disbursing your salary. Below are the key features of an umbrella company:

• The umbrella company takes care of deductions and calculates tax relief on allowable expenses.
• Minimal administrative burden; contractors simply submit timesheets and expense logs online.
• Contractors maintain a continuous employment record, which proves beneficial for mortgage and loan applications.
• Access to statutory benefits and inclusive insurances, providing peace of mind for contractors to focus on their work.

Understanding the difference

Now, let's differentiate between PAYE and Umbrella arrangements:

PAYE:

Tax deductions: Taxes, including income tax and National Insurance contributions, are deducted directly from the employee's salary by the employer of record before payment is made.

Payslip: Employees under PAYE receive a payslip that outlines their earnings, deductions, and net pay.

Umbrella:

Employer of Record: In an Umbrella arrangement, the umbrella company acts as the employer of record. This means that while the worker performs services for a client, legally, they are employed by the umbrella company.

Payment structure: Instead of being paid directly by the client, workers receive payments from the umbrella company.

PEO vs PAYE

It's also essential to understand the difference between a Professional Employer Organisation (PEO) and PAYE:

PEO: A PEO is a company that provides comprehensive HR services to businesses, including payroll processing, employee benefits administration, and compliance assistance. In a PEO arrangement, the PEO becomes the employer of record while the client retains control over the day-to-day management of employees.

If you want to learn more about PEO, read our blog here!

In summary, while both PAYE and Umbrella arrangements serve the purpose of different ways to get paid, there are differences between the two. PAYE involves direct employment by the employer, while Umbrella company, you become an employee of the umbrella company.

For users of Giant Group, understanding these distinctions is crucial for making informed decisions about their employment arrangements. Whether opting for PAYE or an Umbrella arrangement, ensuring compliance with tax laws and regulations is so important. By partnering with Giant Group, individuals can get through these complexities with confidence, knowing that they have a reliable service in managing their payroll and employment needs.