As a recruitment agency, you often face the challenge of advising your contractors on the best payment method.
There are two options: umbrella employment and agency PAYE.
Understanding the differences, advantages, and disadvantages of each can help you provide informed guidance to your contractors. Let’s dive into the details.
Understanding umbrella employment
Umbrella employment involves contractors being employed by an umbrella company. The umbrella company handles all administrative tasks, including payroll, tax deductions, and compliance with employment laws.
Contractors submit their timesheets to the recruitment agency, who then sends a breakdown to the umbrella company, requesting an invoice. After deducting taxes, National Insurance Contributions (NICs), and a small margin for their services, the umbrella company pays the contractor.
Advantages of umbrella pay:
- Continuous employment:
Contractors enjoy continuous employment, which is beneficial for mortgage applications and financial stability - Statutory benefits:
Access to statutory benefits such as sick pay, maternity/paternity pay, and holiday pay - Administrative ease:
The umbrella company handles all administrative tasks, reducing the burden on contractors - Insurance coverage:
Comprehensive insurance packages, including employers liability and professional indemnity
A note about umbrella employment and IR35
On the subject of umbrella employment, we must consider the implications of IR35 legislation. IR35 is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a personal service company, but who would be an employee if the intermediary was not used.
For contractors, working through an umbrella company can simplify IR35 compliance. The umbrella company acts as the employer, ensuring that all necessary taxes and National Insurance Contributions are deducted at source.
It means end hirers, recruitment agencies and contractors do not need to worry about IR35 assessments or potential liabilities, as the umbrella company employs the contractors on a PAYE basis. This completely eliminates the complexities of the IR35 legislation, as it only applies to “Off-Payroll working”.
This can provide peace of mind and reduce administrative burdens, making umbrella employment an attractive option for those concerned about IR35.
Disadvantages of umbrella employment:
- Service fees:
Umbrella companies retain a small margin from the agreed contract income to cover the cost of employment, which can range from £10-£35 per week - Less control:
Contractors have less control over their finances as the umbrella company manages all deductions
Understanding agency PAYE
Agency PAYE means the contractor is employed directly by the recruitment agency for the duration of their assignment. The agency handles payroll, tax deductions, and NICs, paying the contractor through their PAYE system.
Advantages of agency PAYE:
- Simplicity:
Straightforward payroll process with the agency handling all tax and NIC deductions - No Additional Fees:
Contractors do not incur additional service fees as with umbrella companies - Direct Employment:
Contractors deal directly with the agency for all employment-related issues
Disadvantages of agency PAYE:
- No Continuous Employment:
Employment is tied to each assignment, which can affect financial stability and mortgage applications - Limited Benefits:
Fewer statutory benefits compared to umbrella companies - Administrative Burden:
Contractors may need to manage some administrative tasks themselves, such as starter/leaver process each time the change assignments/agencies.
Which is the best option?
The choice between umbrella employment and agency PAYE depends on the contractor’s individual circumstances and preferences.
For contractors seeking stability, umbrella employment offers continuous employment and comprehensive benefits, making it ideal for those seeking financial stability and long-term security.
For contractors preferring simplicity, agency PAYE is straightforward and cost-effective, suitable for those who prefer a simple payroll process without additional fees.
An overview…
Ultimately, both options have their merits. As a recruitment agency, providing clear information about these choices can help your contractors make informed decisions that best suit their needs.
When you get to grips with the differences between umbrella employment and agency PAYE, you can better support your contractors. Therefore, you enhance your agency’s reputation as a knowledgeable and reliable partner.