Whether you are currently considering contracting or have years’ worth of experience under your belt, making the right decision between Umbrella or PAYE will have a big impact on your career.

Amongst other things, whether you choose Umbrella or PAYE will directly influence what contracts you work on and when, whether you receive one handy tax code and whether you can claim back expenses that can be offset against your tax bill.

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That’s why it’s crucial that every contractor looks at their options and does their research, to make a well-educated, well-informed decision that’s just right for them.

However, here at Umbrella Broker, we know it that the world of PAYE or umbrella can be confusing. That’s why we have created this quick and comprehensive guide outlining the key differences between the two options, so every contractor can make the right decision and take the best path in their career. 

PAYE vs Umbrella: Explained

Let’s start by looking at both terms and outlining exactly what they mean.


PAYE simply refers to the most standard form of taxation in the UK – pay-as-you-earn.

Contractors can choose to work with a PAYE agency who will in turn employ them and pay them a salary under the PAYE system. This means the contractor’s tax and National Insurance contributions will be deducted from their salary before it is paid to them, just as a standard UK employees would be.


The other option for contractors is to work with an umbrella company. With this route, the umbrella company employs the contractor and pays them a salary, also deducting their tax and National Insurance contributions through PAYE.

This is where many contractors can face confusion. Both PAYE and umbrella are set up with the same structure and pay the contractor in the same way, meaning neither option is more cost-effective than the other.

But, there are key differences between the two that can make a big difference on the contractor’s life. Next, we will outline these differences, to help you decide which is the best option for you going forward.

Umbrella vs PAYE: Key differences

Which contracts can I work on?

With a PAYE agency, the contractor cannot choose which contracts they work on and when. Instead, the agency finds and secures contracts which the contractor must then undertake.

On the other hand, with an umbrella company, contractors are free to source and secure their own contract work.

So, which option is better?

Perhaps you want the ease of having your contract work chosen for you, in this case, a PAYE agency would be best. Or, you might be a contractor that wants to be in control of their work and career progression, in which case the umbrella route would be most suitable.

Which is easiest to join?

The good news is for contractors is that it is equally as easy to join an umbrella company or a PAYE agency, so this shouldn’t sway your decision.

Will I receive statutory benefits?

Again, with both the PAYE and umbrella routes, contractors will be entitled to statutory benefits. This is because they are employed by the PAYE agency or umbrella company, meaning they qualify for rights such as sick pay, holiday leave, maternity or paternity leave and a workplace pension.

Can I claim expenses?

When it comes to claiming back expenses, this is where the PAYE and umbrella routes differ.

In general, PAYE agencies do not allow contractors to claim back expenses which many contractors view as a drawback.

However, most umbrella companies do let contractors claim back legitimate business expenses.

This is a big advantage for umbrella contractors, meaning they can input expenses which will then be offset against their tax bill, potentially meaning extra savings that PAYE contractors miss out on.

Will I receive continuity of employment?

This is another area where the two options differ. Umbrella companies offer continuity of employment for contractors, meaning one handy tax code. This means that although you might have worked on several different contracts with different clients, you still only have one employer, the umbrella company.

Having just one employer and therefore one tax code comes in handy when it comes to things like applying for a mortgage or a loan.

On the other hand, a PAYE agency does not offer continuity of employment. Instead, each new contract you work on is considered as a separate run of employment. This isn’t good news for contractors who are looking to move homes or apply for loans.

PAYE vs Umbrella: Which is the best option for me?

Now we have outlined the key differences between both options, you can weigh up the pros and cons of each to find the best way forward for you.

There is no one size fits all answer when it comes to PAYE or umbrella. Instead, contractors must assess their contracting needs and requirements against what an umbrella or PAYE agency can offer to find the best fit.

From experience, however, we know that many contractors opt for the umbrella company route. After all, with an umbrella company, contractors are in control of their careers, with the ability to choose what work they take on, and can also enjoy benefits such as claiming back expenses and having the security of one handy tax code.

So, if this sounds like the way forward for you, the next step is to find the best umbrella company.

Use Umbrella Broker’s contractor calculator to find the best route forward

Finding the best umbrella company for you isn’t as hard as it sounds. In fact, at Umbrella Broker we’ve made it quick and easy, helping contractors find the best company for them in just 2 minutes.

All contractors need to do is head over to our umbrella calculator, put in a few simple details and hit go. Next, you will see a list of the best umbrella companies suited to your needs. We will even show you what your payslip will look like under each company, so you can rest assured that you’re making the right choice.

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