Understanding the different types of payroll schemes can be both a complicated and confusing task. It is to best opt for the one which is best suited for you and your employees in order to unlock savings, enjoy a smooth and cost-effective payroll system. This blog will cover the differences between PAYE (Pay-As-You-Earn) and Umbrella payroll systems.
What is PAYE?
PAYE stands for Pay-As-You-Earn and is the most common and standard way workers in the UK pay their tax. A worker gets employed by a recruitment agency for the duration of their contract, and are paid directly by the agency's payroll.
Under this system, PAYE calculates staff contributions for tax and National Insurance while they are earning their pay during the year. These deductions are usually taken from the salary before it is paid.
This method removes the need for individuals to complete tax return forms and submit them to the HMRC.
What is Umbrella Payroll?
Umbrella Companies also process payments through the PAYE system. This scheme is best if you take on temporary employment as it allows greater freedom over what projects the contractor wants to take on. When you join an Umbrella company, you become an employee of that company.
This system unlocks savings for both the employer and the employee through a scheme designed by HMRC which covers expenses and NI against the pay roll company. Umbrella is an ideal way that you as a business can help your temporary employees receive more of their income, effectively meaning increasing their net pay.
So, what is the difference between the two?
- In essence, PAYE is when an agency is the contractors employer and is solely responsible for paying their salary. On the other hand, an agency can join and pay an Umbrella company who will manage any pay deductions before paying the contractor their salary.
- Unlike Umbrella, tax relief on any expenses is not obtainable in PAYE. One of the key differences and additional benefits, is that the Umbrella company will make the necessary deductions as well as calculate any tax relief on allowable expenses such as food and travel, this can result in an increase in take home pay.
- The continuity of employment between contracts that Umbrella companies offer will help assist you when applying for a mortgage/loan. Whereas PAYE worker's employment ends the same time the contract does, hence each new contract is a different type of employment.
- The contractor is entitled to statutory sick pay and other statutory benefits in both schemes.
Whether you opt for agency PAYE or Umbrella as your chosen payroll scheme, it is best to consider the one which will reduce the legislative and administrative stress of payroll so you may relish in a hassle-free approach to contracting.
Here at Happie Group, we are happy to take on this burden and make your payroll as smooth and efficient as possible.
Contact us today for further information on the services we provide.