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Umbrella Company and Agency PAYE – Why the Rates are Different

Umbrella Company

Where your contractors need to be engaged on a PAYE basis, there are two main options. They can be paid directly by you as the recruitment agency (Agency PAYE) or you can outsource the engagement of contractors to an umbrella company (Umbrella Company Employment).

The rate you pay is different, but the two options still cost you the same. In this article, we’ll explain why that is.

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The Agency PAYE Rate

Where you pay the contractor directly, the rate you pay is the contractor’s gross pay. Your payroll will deduct PAYE tax, employee National Insurance (NI), employee pension contributions and any other statutory deductions, and the rest will be paid to the contractor.

However, this rate does not represent the total cost – you will have other costs to pay, including employer’s NI, Apprenticeship Levy, employer pension contributions and holiday pay.

The fee you charge the end client for the contractor’s work includes the contractor’s gross pay, your profit margin, and these costs. 

The Umbrella Company or Assignment Rate

Where the contractor is employed by an umbrella company, the umbrella incurs these additional costs instead of you. The rate you pay the umbrella company includes the contractor’s gross pay and the employment costs that you would have paid – so while the rate you pay is higher, the cost to you is the same.  

Managing your contractor’s expectations

The contractor’s gross pay should be the same in both cases – the fact that the umbrella rate is higher does not mean the contractor can expect to be paid more.

It’s important that the contractor understands:

  • The rate paid to the umbrella company is not their pay
  • They are not paying the employment costs – the umbrella company is

Where contractors are led to believe that the umbrella rate is the amount that will be paid to them, this may give them unrealistic expectations and they may think the employment costs are being taken out of their pay.

This kind of confusion has led to unnecessary complaints, and even legal action where contractors believe unlawful deductions have been made.

Key information Documents

In a measure designed to combat such confusion, recruitment agencies are now required to supply each contractor with a Key Information Document (KID) before they accept a new assignment. KIDs must include:

  • The type of contract the contractor is employed under
  • The minimum rate of pay they can expect
  • How they are to be paid
  • If they are paid through an intermediary (e.g. an umbrella company)
  • Any deductions or fees that will be taken
  • An estimate or example of what this means for their take home pay

A KID must be issued no matter how the contractor is to be engaged. A good umbrella company will be able to help you implement this process if necessary.

Why is umbrella employment better?

Given that the contractor will be paid the same in both cases, what’s the advantage of being employed by an umbrella company?

The main benefit is that they’re fully employed, and they have a single period of employment across all their assignments. This gives them all the rights, benefits and protections of employment, including:

  • Statutory payments like sick pay and maternity/paternity pay
  • Paid holiday
  • Access to a workplace pension

Depending on the umbrella company, they may receive additional benefits, over and above these legal requirements. For example, Orange Genie Employees get access to Orange Genie Edge, our extraordinary employee benefits platform.

Umbrella company

If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email

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