Sub banner


Navigating PAYE vs Umbrella Employment – what contractors need to know

Navigating PAYE vs Umbrella Employment – what contractors need to know

by on December 21, 2023

We’re frequently asked why a contractor should be employed by an umbrella company as opposed to just working through the PAYE system. Here we look at the pros and cons of the two arrangements, find out what the differences are, and offer information on how to choose the right one for you, based on your personal circumstances.

Contractors’ choice

When you apply for an assignment through a recruitment agency you may be offered the choice of how you want to be employed – through traditional Pay As You Earn (PAYE) or through an umbrella company such as Payme. 

You must have all the information you need to make an informed choice about the two different employment models so you can make the right decision. Let’s take a look at how they work.

Employment status

By joining an umbrella company you quickly and simply become its employee. This means that you have a full package of employment rights, and your Income Tax, National Insurance Contributions, and other contributions are taken care of on your behalf. There are no tax returns to fill in every year, nor do you have to employ an expensive accountant to look over your books and deal with HMRC on your behalf. As your employer, the umbrella company offers you a record of continual employment (something vital if you’re applying for a mortgage) as well as a full range of statutory rights such as sick pay, maternity or paternity pay, and the ability to pay into a private pension through salary sacrifice.

As a PAYE employee, you’ll be employed by the recruitment agency that handled your application for the role and you’ll be paid directly by it. Unlike being employed by an umbrella company, when your assignment comes to an end, so does your employment, so there’s no continuity or record of continual employment – you just have to start again. This can directly impact your ability to obtain credit or a mortgage. In addition, some agencies pay slightly lower rates, in contrast to the ‘uplifted’ rate that umbrella employees receive.

IR35 Status

The off-payroll rules were introduced in 2021 and are designed to clarify whether someone should be seen as an employee or as a legitimate contractor. HMRC has a tool called CEST (Check Employment Status for Tax) which contractors can use to clarify their status determination, as the onus now falls on the end client; however, as we’ve discussed previously CEST is sometimes lacking in accuracy and can provide an indeterminate result. If you’re working through PAYE, this can cause problems with both your end client and HMRC, and you may end up paying more tax than you need to. 

However, if you’re a Payme employee, we can check your status far more quickly and accurately, thanks to the sophisticated software we use. And what’s more, if HMRC raise a query about your status, we can provide them with the evidence they need to prove that you’re outside of IR35.

Service and support

If you’ve ever been unlucky enough to have had issues at work, or not been paid on time a good HR department can usually sort it out quickly and with the minimum of fuss and bother. However, if you’re a PAYE contractor, you might not know where to turn for support – as you’re not an official employee of the end client they might be hesitant to act in your best interest. 

When you’re an umbrella employee though, things are very different. Here at Payme, we offer all our contractors a dedicated account manager who can help from the start of your contracting career – with registration, payslips, payments, tax and NI issues and a whole range of other details, to make your life simpler and easier. We also give all our contractors our Employee Handbook which is packed with advice and information about every aspect of your employment so you’re supported from day one. 

And remember, because we’re members of the Freelancer & Contractor Services Association, you can rely on us to guarantee the highest levels of compliance and integrity – something that the 4,000 contractors we pay every week already enjoy. If you’d like to join them you can call us to discuss your options and the benefits we bring to compliant contacting on 0333 200 0845, email us at, or fill in the contact form here.