You’ve probably heard PAYE and Umbrella mentioned countless times, but what exactly do both entail?
We here at Optimum Pay Group provide a brief rundown of the two services so you don’t have to go Google crazy trying to find out.
What is PAYE?
PAYE stands for Pay As You Earn and is the most common form of taxation for most full-time and part-time employees. It is the way in which you pay income tax and National Insurance (NI). The employer deducts all the tax and NI contributions accordingly from employee’s wages or occupational pension before a finalised wage is paid.
Every aspect of wages is taken care of, including sick pay, maternity or paternity pay, with tax being paid throughout the year instead of in one lump sum. It’s the employer’s responsibility to send tax to HMRC, where the employee will eventually receive a pay slip with a breakdown of all deductions. Following the end of the tax year, which runs from 6 April to 5 April the following year, a P60 is produced that provides a summary of all deductions in that tax year.
What is Umbrella?
The Umbrella company hires contractors who work on temporary assignments. This is a popular choice for recruitment agencies as it takes the burden of handling wages, with all calculations being taken care of by the Umbrella company and agent liability being reduced.
Differences between PAYE and Umbrella are minimal, with every process of payroll and PAYE taxation remaining relatively the same. However, one significant difference is the freedom in which a contractor can choose between using agency PAYE or Umbrella company PAYE, where you work through PAYE without the need to complete a tax return. By working through Umbrella, they can work through recruitment agencies with the added benefit of acquiring work elsewhere if needed.
Which is Best For You?
Both Umbrella and PAYE provide near identical services. When it comes to deciding which is the best option, this is where a more thorough analysis is needed, putting each under the microscope.
For contractors who wish to remove the extra work involved in producing self-assessment and want everything through PAYE to be taken care of, then an Umbrella company is the more appealing option. Though there are processing fees umbrella companies will deduct from your gross pay, nothing needs to be done on the contractor’s side.
Working under an agencies’ payroll, they will process salaries through PAYE, which, compared to Umbrella, will create restrictions, as the agency determines which jobs you take on and when you work.
If you’re interested in finding out more about Umbrella companies, you can visit our website for more information. You can also check out our more in-depth look at the benefits of using umbrella.