Umbrella companies vs PAYE for temps

Sign up with an agency for temporary work and you will often be asked a question that catches people out: how do you want to be paid, through PAYE or an umbrella company. It sounds like an administrative detail, but it affects your take-home pay, your rights and how simple your working life is. Here is what each one means, in plain English, and how to make the right call.

What agency PAYE means

With PAYE, the recruitment agency pays you directly as a worker. They deduct your Income Tax and National Insurance at source before the money reaches you, and they handle your holiday pay and pension. You get a payslip from the agency showing exactly what you earned and what was deducted. For most temporary workers this is the simplest and safest option, because there is no middleman taking a cut and your entitlements are handled for you.

What an umbrella company means

With an umbrella arrangement, a separate company sits between you and the agency. The umbrella company becomes your employer, runs your payroll and pays you, usually charging a weekly or monthly margin for doing so. Agencies often use umbrellas to simplify their own admin when placing lots of temps. A legitimate umbrella still gives you employment rights and handles tax properly, but there are important things to check.

The key differences

The headline hourly rate quoted for umbrella work is sometimes higher, but that can be misleading, because the umbrella margin and certain costs come out before you see your money.

Watch the assignment rate trap

One thing genuinely trips people up. Some umbrella arrangements quote an "assignment rate" that is higher than a normal PAYE rate, but that figure has to cover the umbrella's own costs, such as the employer's National Insurance and the apprenticeship levy, which are then deducted before your taxable pay is worked out. Always compare your actual take-home pay, not the headline rate. Ask for an illustration showing your net pay after all deductions before you agree to anything.

Staying safe with umbrella companies

• Read your Key Information Document, which the agency must give you and which sets out the rate, deductions and who pays you.
• Check the margin the umbrella charges and make sure it is clearly stated.
• Make sure holiday pay is recorded properly and not quietly rolled into your rate without explanation.
• Be very wary of any scheme promising unusually high take-home pay, since these can be tax avoidance arrangements that leave you owing HMRC later.
• Keep your payslips, and query anything you do not recognise.

Which should you choose?

For most temporary workers, straightforward agency PAYE is the least hassle and the safest. There is no margin eating into your pay, your tax and holiday are handled, and there is less that can go wrong. An umbrella can be perfectly legitimate, and sometimes an agency will only offer umbrella for a particular assignment, but it pays to understand exactly what you are signing up to. If you are offered a choice, compare the real take-home figures, ask about the margin, and avoid anything that sounds too good to be true. When in doubt, PAYE is the safer default.