In recent months, we’ve had a lot of inquiries from both contractors and agencies asking to contrast an agency PAYE arrangement against an umbrella solution.
These aren’t the only options for contractors. A contractor with a limited company working outside of IR35 can also use a PAYE payment model if they choose. Nonetheless, lately people have been comparing the two models specifically, so let’s take a look.
Tax Implications: PAYE vs. Umbrella
At the most basic level, under the agency PAYE model things are simple, with all of the responsibility falling on the agency that is engaging the contractor to make the correct deductions for income tax, National Insurance contributions (NICs), and workplace pensions. PAYE also provides full statutory benefits. Not all agencies offer this and you may work on multiple assignments with different agencies so you may prefer to choose an umbrella company.
An umbrella company becomes the employer, forming an additional level between the end client, agency and contractor. It can reduce administration for the agency, means you can work on multiple assignments with different agencies and with both options, you’ll need to ensure they’re operating compliantly.
That’s some reasons why which is better is so hotly debated – it doesn’t just depend on your own financial situation and plans.
If you’re also thinking about working through your own limited company, it’s particularly important to understand whether the role is inside or outside IR35, as that has significant ramifications for your final take-home pay.
Ease of Operation: PAYE vs. Umbrella
For the end user, a compliant umbrella solution can be simpler, reducing your administrative load; payroll, compliance, and benefits are processed by the umbrella solution itself. This is particularly useful for contractors carrying out many shorter-term assignments as it ensures you will remain compliant throughout with minimal extra work. You’ll receive the same statutory benefits as PAYE.
At the time of writing, of course, April 2026 isn’t far in the future – and at that point a number of reforms come in for umbrella tax obligations. There’s more detail in the linked article, but for the short version: you can expect to see fewer umbrella solutions available for a time, as the new legislation tightens requirements for umbrella companies. This is a positive move for contractors under umbrella solutions in general, but may mean some need to move to a more compliant Umbrella solution, such as ICS’.
One Question, Many Answers
In general, the guidance above should give you a rough idea of which solution is more likely to benefit you. However, every arrangement is different. If you’re not sure which option is best, please get in touch and we’ll help you put them both in perspective.
