Difference between Agency Payroll and PAYE Umbrella

06 May, 2020

As a contractor if you are taking an assignment through a recruitment agency and have decided not to use a Limited Company or be a sole trader for whatever reason, you will need to make a choice between getting paid directly through the Agency or via an Umbrella Company. The blog covers the main differences between working through an Umbrella Company and an Agency Payroll.

Difference between Agency Payroll and PAYE Umbrella

What is an Agency Payroll?

Under an agency payroll, you will be directly employed by the agency as an ‘agency worker’ for the term of the assignment and the agency will be responsible for processing your income directly as Pay-As-You-Earn through their payroll system. Here the agency, will undertake the administrative tasks and manage the necessary tax compliance your work. This is the simplest way to get paid if you are undertaking a single or one-off assignment.

What is an Umbrella Company?

Working through an umbrella means you will become an employee of the Umbrella Company and paid through their PAYE system. The umbrella company will deduct Income Tax and National Insurance and pay you a salary. It acts as an intermediate channel between the contractors and their recruitment agency and manages all the administration, tax and compliance required for you to undertake in return of a small margin. Umbrella is the recommended choice if you will be undertaking multiple assignments or jobs in the future.

Both options are very similar, as the companies employing you will be responsible for managing tax, administration, compliance and maintaining records, with no burden or hassle on you. So, how are the options different?

Benefits and Drawbacks of Agency Payroll and PAYE Umbrella Company

The key differences between the two options is - firstly the Umbrella company can process allowable expenses as tax-free which would reduce the underlying tax liability and increase your take home. The claiming of expenses will depend on Supervision, Direction and Control status and whether you work multiple sites. The agency will usually not process any expenses.

The second difference is that unlike the agency, where you will be employed under a fixed term contract ending when the assignment ends, the Umbrella company offers continuous employment, as you will be able to undertake a series of assignments/multiple assignments under one employment contract. This offers continuity of employment and help in case if you are applying for mortgage, loans etc.

The third big difference is the rights and benefits you enjoy working through an Umbrella company. With the Umbrella, you will be entitled to all the statutory employment rights – sick pay, holiday pay, maternity/paternity pay, and the umbrella will pay also include insurance like professional indemnity and public liability in part of their offering at no additional costs to you. With agencies some of the statutory employment rights may be restricted as you are classed as an ‘agency worker’.

Other than that, you will also receive additional employee perks which majority of the Umbrella Companies Offer. For Instance, with DNS Perks you can discount on shopping with thousands of high street retailers, cinema tickets, gym membership and a lot more.


As you can see that working through an Umbrella company has its own advantages and is a better option compared to the agency PAYE. The agency is sometimes happy to negotiate the rate if you work through an Umbrella as it means reduced administration burden and responsibilities for them. Speak to one of our consultants today to find out the benefits of working through DNS Umbrella.