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Umbrella Company Employment and Agency PAYE – What’s the Difference?

Umbrella Company

Where your contractors have a choice between being engaged directly by you, under Agency PAYE, or being employed by an umbrella company, they may need your help and advice. It isn’t quite as simple as who runs the payroll and there are some misconceptions, so in this article we’ll explain the difference in detail.  

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Agency PAYE

This is where you engage the contractor directly, and pay them using your internal payroll. The contractor will be engaged by you, and will have no contractual relationship with the end client. The client pays you the agreed fee, and from this fee you cover your costs, make a profit and pay the contractor for their work.

Umbrella company






You will usually engage the contractor separately for each assignment, meaning they will have limited employment rights while they’re working, and none at all when between assignments.

Umbrella company employment

This is where the contractor is employed by an umbrella company, instead of being engaged by you. The umbrella company employs the contractor and supplies their services to you and you in turn supply those services to your client. The contractor has a contract of employment with the umbrella company, and has no contractual relationship with you or the end client.

As before, your client pays you the agreed fee, you make a profit and pay an assignment rate to the umbrella company, who cover their costs and pay the contractor as their employee.

umbrella company

There is a single period of employment across all the contractor’s assignments and they have all the rights, protections and benefits of employment. This applies when they’re working and when they’re between assignments. 

The assignment rate

The assignment rate, which you pay to the umbrella company, includes the contractor’s pay, the umbrella company’s margin and the costs of employment which are now paid by the umbrella company.

Advantages of umbrella company employment

The contractor benefits from being permanently employed, which means they have full employment rights and benefits, including:

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

They have a single period of employment across all their assignments, rather than a series of short engagements. This means they still have full employment rights when they’re between assignments, and it can make references, credit and mortgages easier to obtain.

Depending on the specific umbrella company, contractors may also receive additional benefits. For example, Orange Genie employees receive a host of benefits designed to help them make their money go further, care for themselves and their families and get more out of contracting.

Advantages of outsourcing employment to an umbrella company

By outsourcing employment to an umbrella company, recruitment agencies hand the cost, work and risk of employment into expert, specialist hands. This means you don’t need to be an employment expert yourself, and frees up the time you would have spent dealing with payroll queries from your contractors.

The importance of choosing a compliant umbrella company

Not every umbrella company is willing or able to handle employment as they should, and involvement with the wrong umbrella could be disastrous for all concerned. We strongly recommend that both recruiters and contractors only work with umbrella companies who are accredited by FCSA so you can be sure of their competence and their commitment to doing things properly.

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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